Salons Seek to Capitalize on Tips Frenzy for Tax Credit Push

Beauty salons and barber shops want to use momentum behind both presidential hopefuls’ campaign proposals to end taxes on tips, to reach parity with the restaurant industry they’ve been trying to get for 30 years.

Those businesses, mostly owned by women and often by members of minority communities, are pushing to give hair and nail salons, barber shops, and spas the same federal payroll tax credit that’s available only to restaurants—the other major industry where tipping is common. Food and beverage employers can reduce their tax burden by claiming a credit for the Medicare and Social Security taxes they pay on their workers’ tips.

The proposal to extend the tax credit to the beauty industry is bipartisan, introduced by Democrats and Republicans on the tax-writing committees in both chambers, and the issue doesn’t run into many of the obstacles that typically clog up action on Capitol Hill. It would encourage tax compliance and provide tax relief to small businesses. Despite support, the legislation has stalled in Congress, highlighting how difficult it is to enact legislation when there isn’t a powerful group behind it, like the restaurant industry.

Without that credit, beauty industry employers pay taxes on income they don’t even see, given that tips solely go to workers. Those costs and a lack of action from Congress feel personal to many small business owners, said Myra Reddy, government affairs director for the Professional Beauty Association, which represents over 100,000 professionals in the sector.

“The tax code is not supposed to pick winners and losers or pit industry against industry, because it does create an unlevel playing field,” Reddy said.

Tax Parity

Many in the beauty industry support pledges from presidential contenders Vice President Kamala Harris and former President Donald Trump to exempt tips from taxes—though the details of those policies are still unclear. But salon owners want to ensure that any new policy will include the tax credit they say will equalize the tax treatment across industries that rely on tips.

Historically, restaurants have been much more effective in pushing for their priorities in Washington as the beauty industry remained fragmented and unable to advocate for their causes with the same success, said Steve Hockett, CEO of Great Clips, a hair salon franchise with over 4,000 locations. Some stylists and barbers are also self-employed, adding to the complexity of how they’re tipped.

“The restaurant industry and all the affiliated were very, very coordinated in their approach and were able to secure that 45B section of the tax code to their advantage, and other tip industries just either were not involved or didn’t know,” he said, referring to the part of the tax code that established the credit. “There’s more awareness and organization today around this in the beauty industry than there was 30 years ago.”

While the tax-free tips proposals would benefit workers, the Federal Insurance Contributions Act (FICA) tax credit would go to the employer.

The legislation that would give the tax benefit to salon and barbershop owners has bipartisan support in the House and the Senate. The bill is sponsored by Reps. Suzan DelBene (D-Wash.) and Darin LaHood (R-Ill.) and Sens. Ben Cardin (D-Md.) and Tim Scott (R-S.C.).

And while the beauty industry proposal hasn’t gained much traction in the last few years, beauty industry backers say they’re united in their effort for tax-free tips, which could lead to an opening to finally get their tip tax credit.

The PBA has been engaged in discussions with the lawmakers behind the tax-free tips effort on Capitol Hill, Reddy said. Hockett, from Great Clips, too, has brought weight to the effort as he chairs the board of the International Franchise Association, a powerful trade group that has made the tip tax credit for beauty businesses one of its top priorities.

“If you’re not entirely interested in the issue of taxes on tips you may be interested in the fact that a credit has existed for 31 years now but it’s solely for one industry,” Reddy said.

Tip Compliance

DelBene’s spokesperson Nick Martin noted that the legislation would both reduce the tax burden on beauty professionals while also encouraging tax reporting of tips, as it did with the food and beverage industry.

The bill would simplify and improve information reporting compliance related to professionals in the beauty industry, according to legislative summaries.

Encouraging tax compliance and getting a tax credit would help the salon owners who classify their workers as employees compete, said Frank Zona, a salon owner in Massachusetts and a member of PBA.

Some salons classify their workers as independent contractors, meaning those workers aren’t on a payroll and don’t receive insurance or other employment benefits. Others, similar to landlords, rent out space in their salons for self-employed stylists.

It’s more expensive for Zona and other salon owners who classify their workers as employees.

“Restaurants have it. We should, too,” Zona said. “It’s even more important here, because of the self-employment dynamic that’s happening. In order for me to compete, this credit would really help.”