FICA Tax Tip Credit for Salons & Spas

Tipping is customary practice in the beauty service industry. Allowing employees to accept tips is a necessary part of salon ownership but comes at a steep cost to the business. Why? Because salon employers are required to pay FICA taxes on customer-paid tips, despite the business receiving no revenue on the tips.

In 1993, Congress passed the 45B FICA tax tip credit, allowing restaurants to claim a dollar-for-dollar tax tip credit on the employer portion of FICA taxes that businesses pay on tips employees receive directly from the restaurant’s customers.

How is this fair? Tips to restaurant employees should not be treated differently from tips to salon employees. These two industries share tip reporting burdens, but do not share the relief granted by Congress to the restaurant industry 29 years ago. As the second-highest tipped industry, salons should receive parity with the restaurant industry in the tax code as it would allow owners to keep their businesses viable and enable them to provide additional employment opportunities as well as better benefits to their employees. 

• Salons are predominantly women and minority-owned small businesses.
• The salon industry is primarily comprised of small businesses – 83% of salon businesses have fewer than 10 employees.
• These small businesses, owned 60% by women and 34% by minorities, provide entry-level jobs and employ a workforce of roughly 1.3 million professionals.
• Overall employment of barbers, hairstylists, and cosmetologists is projected to grow 19 percent from 2020 to 2030, much faster than the average for all occupations.

The 45B FICA Tax Tip Credit for Salons is bipartisan, bicameral legislation that directly helps women, minorities, and small business owners while shrinking the tax gap and increasing tip reporting compliance. Including the salon and spa industry in this legislation could help our industry greatly by allowing salons and spas to keep money in their business.

Extending this credit to salons is long overdue, and Congress needs to act to extend it to our industry by the end of the year. By spreading the word, we hope we can influence lawmakers to take action and get the salon industry the same tax rights regarding tipping as the restaurant industry.

Take Action Now to ask Congress to extend the 45B FICA Tax Tip Credit to salons by the end of the year.