The Small Business Tax Fairness and Compliance Simplification Act aims to extend tax credits for Social Security taxes on employee tips to beauty service establishments, establish a tip reporting safe harbor for employers in the beauty services industry, and require information reporting of income from space rentals in the beauty service industry.
Darin LaHood
Representative
IL-16
The Small Business Tax Fairness and Compliance Simplification Act introduces tax benefits and compliance simplifications for small businesses, particularly those in the beauty services industry. It extends a tax credit for employer Social Security taxes paid on employee tips to beauty service establishments and provides a "tip program safe harbor" protecting businesses from IRS tip examinations if certain conditions are met. Additionally, the act mandates information reporting to the IRS for income from space rentals in the beauty service industry when payments reach $600 or more from at least two providers.
Beauty Businesses May Get Tip Tax Credit, Face New Reporting Rules Under Proposed Act
This bill, the Small Business Tax Fairness and Compliance Simplification Act, focuses specifically on the beauty services industry – think salons, barbershops, nail techs, and spas. It aims to extend an existing tax break related to employee tips to these businesses, while also setting up new rules for reporting tips and rental income.
Trimming the Tax Bill: The Tip Credit Expansion
First up, the bill extends the FICA tip credit to beauty service establishments (Section 2). Currently, this credit helps restaurants offset some of the Social Security and Medicare (FICA) taxes employers pay on employee tips. This change would allow qualifying beauty businesses to claim a similar credit for tips their employees receive for services like haircuts, nail care, or spa treatments, starting in tax years after December 31, 2024. There's a catch: the credit only applies if tips for beauty services make up more than 15% of the business's gross receipts from those services. For a salon owner, this could mean a reduction in their payroll tax burden if tipping is common practice.
Staying Out of Hot Water: The Tip Reporting Shield
Next, the legislation introduces a "tip program safe harbor" specifically for beauty service employers, effective for tax years after December 31, 2025 (Section 3). Essentially, if a business owner jumps through a few hoops, the IRS agrees not to initiate tip examinations. What hoops? They need to run a quarterly educational program for staff about reporting tips correctly, set up a system for employees to report their tips (cash and charged, if over $20 a month), stay current on all their federal tax filings and payments related to tips, and keep specific records (like employee contact info and gross receipts) for four years. This offers protection from audits, but smaller shops might find implementing and maintaining the required quarterly training and detailed record-keeping a challenge.
Accounting for Booth Rent: New Reporting on the Books
Finally, the bill adds a new reporting requirement for businesses that rent out space, like booths or chairs, to beauty professionals (Section 4). Starting for payments made after December 31, 2025, if a business collects $600 or more in rent during the year from each of two or more separate beauty service providers, they'll need to report that rental income to the IRS. This report must include details like the provider's name, address, Taxpayer Identification Number (TIN), and the total rent paid. The business also has to give each provider a statement summarizing this information by January 31 of the following year. This aims to ensure rental income is properly tracked for tax purposes, but it does add an administrative task for businesses managing multiple rental agreements with independent stylists or technicians.