Small Business Tax Bill Extends Tip Credit to Salons, But Adds New Reporting Rules for Landlords

The “Small Business Tax Fairness and Compliance Simplification Act” aims to give a tax break to the beauty service industry while simultaneously tightening up its compliance requirements. Think of it as the government offering a carrot (a tax credit) and then immediately handing out a stick (new administrative rules).

The Tip Credit Expands: Salons Get a Break (If Tips Are High Enough)

Right now, restaurants can claim a federal tax credit for the Social Security taxes they pay on employee tips. Section 2 of this bill extends that exact same break to businesses providing beauty services, which include barbering, nail care, esthetics, and spa treatments. This is a big win for salons and barbershops, helping them offset payroll costs. However, there’s a key detail: a beauty service establishment can only claim this credit if the tips reported for those services are more than 15% of the total gross receipts from those services for the year. If you run a high-end salon where tipping is generally lower, or if your employees aren't reporting tips consistently, you might miss out on the credit entirely. This change applies to tax years beginning after December 31, 2024.

The IRS Safe Harbor: Audit Protection for Hyper-Compliant Employers

Section 3 introduces a “safe harbor” provision, essentially an audit shield, for beauty service employers. If you’re an employer and you’re worried about the IRS auditing your tip reporting, this section offers protection from a tip examination—if you follow a strict set of rules. To qualify, you must implement mandatory quarterly tip training for all existing employees, provide training to all new hires, and establish a system for employees to report tips monthly. For the employer, this means a significant increase in administrative overhead—you’re now running a mandatory training program four times a year and keeping detailed records for four years. But if you do all that, you get protection from the dreaded tip audit. This takes effect for taxable years starting after December 31, 2025.

New Reporting Rules Target Booth Rentals

This is where the bill hits real estate and small business owners who use the popular booth rental model. Section 4 introduces a new information reporting requirement that directly targets landlords in the beauty industry. If you own a space and rent stations or booths to two or more individual beauty professionals (stylists, barbers, etc.), and you collect $600 or more in rent from any single renter in a calendar year, you are now required to file a report with the IRS. This is essentially a 1099-MISC requirement for rent paid by booth renters. You must report the renter's name, address, Taxpayer Identification Number (TIN), and the total amount of rent collected. You also have to give a statement to the renter by January 31st of the following year. This is a massive change for property owners and salon managers who rent out space. While it improves the IRS’s visibility into this rental income, it creates a new administrative burden for landlords who must now track and report payments, potentially passing those compliance costs on to the small, independent stylists who rent the space. These new reporting rules apply to rental payments made after December 31, 2025.