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Is
receiving a gift from a client in the form of monetary compensation as a way
of saying thank you for
providing outstanding service, regardless of the service you perform
taxable? According to the IRS and your own
State, the answer is yes. The fact is, it is income received. The IRS even
goes so far as to say that there are a
certain set of guidelines that apply to all business owners, their
employees, Booth Renters and Independent
Contractors in the beauty and barbering world. The IRS and your state look
at tips as inclusive or treated
as additional income that needs to be reported whether an employee or self
employed service provider, in two ways.
First off, tips and or gratuities
are supposed to be reported on your federal and state tax forms as either
total income received or as additional income received over a certain
dollar amount each month, at the end of the
year as in your federal tax filling form 1040. (Check with your own state
for filing form number)
From the
business owner’s point of
view the IRS and your state required you to report all revenues
that were received by your staff, meaning your employees. This means that
it is your responsibility as their
employer to take all the necessary tax deductions according to Federal,
Social Security, Medical and your own
state tax issues for all that is reported as income.
This also
means that all the necessary taxes need to be deducted on their pay check on
those tips your
employees said that they received within any given month. If tips are not
reported to the employer by their
employees then they should be included on Form 4137; Social Security and
Medicare tax goes on unreported tip
income on Form 1040.
This
creates several issues for most business owners. One is that even though
the business owner
whether a salon, nail, skincare or any other service providing business
within the beauty and barbering industry,
has to pay their share of those taxes that the business owner never saw like
social security 7.5 % to only name
one tax issue because for the most part the employee received the tip
directly from the client. At the end of the
year the appropriate tax agencies give the business owners a tax credit on
the taxes that the business owner had
to pay on the employee’s behalf. In other words they are requiring us, the
owner with employees, to set aside our
hard earned money for a year without any interest for their use. And in
return they (the Government) will give us a
tax credit for doing that for them. Yippee!
If you
are an owner of your own business and provide services to clients, this
includes booth renters; the
declaration of receiving tip income is your responsibility alone. For
the salon, spa or barber employee, it is
your responsibility to declare the amount of tips you received within a
calendar month to the business owner no
later than the tenth day after that month has ended, for any tips received
over $20.00 that month. This declaration
of tip income received should actually be reported on a tip log included in
IRS Publication 1244 titled Form 4070,
Employee’s Report of Tips to Employer and Form 4070A, Employees
Daily record of Tips to report all tip income
to their employer.
What the
IRS and most states are
looking for from both the self-employed service provider and from all
employees is a national average of somewhere between seven and a half (7.5%)
to twenty (20%) percent of your
income to be from gratuities/tips whether your obligation of that income is
all-inclusive or broken down as part of
additional income received when you file your year end taxes on Form
1040-Schedule C.
Don't
think
that because you are a salon owner or a booth renter you can use the
excuse that you
don't accept gratuities/tips, or most clients don't tip owners as a way
not to declare tips income unless you can
prove that statement through some form of documentation/recordkeeping
that will be provided to all the appropriate
agencies. This will require having a sign posted in public view, usually at
the front desk where clients check out and
at a self-employed operator’s workstation. (That is a big “if”)
Sadly, according to the IRS and most states, our
industry declares very little income generated from tips, you could almost
say zero. So pay attention and do yourself
a big favor, declaring something is better than declaring nothing
- like in the past. After all, the IRS believes that they
are losing somewhere between $17,000,000 and $20,000,000 in unreported
income from the beauty and barbering
industry. They have formed an educational task force to educate our
industry on our tax obligations. If you don’t
believe me, then why are they at almost every trade show throughout the
United States teaching classes or having a
booth passing out material on the subject? For free copies of IRS Forms and
Publications contact the IRS at
(800) 829-3676 or visit
http://www.irs.gov. On a more positive note: Declaring something is
better than declaring
nothing. After all, you have everything to lose if you are audited and an
audit will come. The non-reporting of tips is
only making yourself vulnerable to opening a door that you can not close.
Let’s talk about the benefits of legally reporting your tip income;
we can sum them up quite simply. You
will sleep a lot better knowing that you have complied. It can mean a
savings of back taxes, penalties and interest
payments if you are among the audited ones who have, for whatever reason,
failed to comply in all areas of reported
income. The penalties are only a part of the consequences; you see
whichever agency performs your audit, all the
other agencies will be quick to follow with their hand out expecting their
share of the unreported money, meaning, for
example the IRS and or your state. There is also the panic, frustration and
mental anguish involved, not to mention
paying other professionals to assist you out of your self-created
nightmare. However there is another greatly over
looked value to declaring tip and gratuities as income. You are helping
your own cause for a variety of reasons, so I
would like to explain what some of those great values are to you. First
off, when you are declaring tips as income, you
have created greater value to your income producing bottom line which gives
you greater buying and/or borrowing power.
You know like that new car you want, but can not qualify for because the
payments would be so high and your income
doesn’t match your expenses? Or what about that home you want to purchase
or refinance that you just can’t quite
qualify for even if it’s taking out a second mortgage? Now lets look at it
from the social security point of view which you
pay into when you declaring those tips as income. This type of payment is
actually investing into your own account for
retirement when the day comes that you can no longer work full-time at what
you now love to do. You have just
contributed to your own cause in a way that most people can not save on
their own and you do not even miss what you
don’t have at the time. There is also the disability and medical benefits
of declaring tip income that one can not
overlook if you are smart. Now here is one great value that is very much
overlooked. As a self employed person
you can declare all the income you can possibly create and not pay taxes on
that income up to 2,000,000.00. It’s
called the SEP program. (simple investment program) you only pay the taxes
on that declared income when you
withdraw that income hopefully some time down the road when you can no
longer work.
Isn’t it
time you stopped stealing from yourself?
We have provided the insight to help you understand your
tax responsibilities to guide and direct you when it comes to your tax
issues. If nothing else this information will assist
you in asking the right questions to help you get the right answers from the
right professionals. Remember
April 15, 2002 is just around the corner. Start 2003 off on the right foot! |