A salon owner wears three hats at once in the eyes of the IRS. Employer, for the stylists on payroll. Landlord, for the ones who rent chairs. And cash business, for every walk-in who pays with a twenty and tips with a ten. Each hat has its own rules, and the 2025 tax law changed several of them.
Employees and their tips
If your stylists, barbers, nail technicians or estheticians are employees, the tip reporting rules restaurants live under apply to you too. They are not restaurant rules. They are employee rules.
- Under IRC 6053(a), every employee who receives tips that are wages must report them to the employer in a written statement by the 10th day of the following month.
- Under IRC 3121(a)(12)(B), cash tips under $20 in a month from one employer are not FICA wages.
- Under IRC 3121(q), reported tips are treated as wages paid by the employer for employer FICA, deemed paid when the employee reports them.
So reported tips run through payroll: income tax and employee FICA withheld to the extent possible, employer FICA paid, and tips reported on the W-2. Unreported tips can become an employer FICA problem after the IRS makes notice and demand. The mechanics are the same as for restaurants, covered in our guide to the owner's tip reporting duties.
One restaurant rule does not apply to salons. The Form 8027 annual report and 8 percent tip allocation under IRC 6053(c) apply only to large food or beverage establishments.
The FICA tip credit now covers beauty services
For years, the IRC 45B credit for employer Social Security and Medicare tax paid on tips was available only to food and beverage employers. Public Law 119-21 changed that. Section 45B(b)(2) now also covers tips received in connection with these services, where tipping is customary:
- Barbering and hair care.
- Nail care.
- Esthetics.
- Body and spa treatments.
The change applies to tax years beginning after 2024. The 2025 Form 8846 says so in its What's New section.
There is one difference from restaurants. Food and beverage employers compute the credit using the minimum wage as in effect on January 1, 2007, which the Form 8846 instructions state as $5.15 an hour. For beauty service employers, the instructions use the federal minimum wage currently in effect, $7.25 an hour. For each employee and each month, tips are creditable only to the extent they exceed the amount needed to bring cash wages up to $7.25 an hour for the hours worked. The credit is 7.65 percent of creditable tips, adjusted for any employee above the Social Security wage base ($176,100 for 2025), and your deduction for employer payroll taxes is reduced by the credit. The details are in our Form 8846 guide.
Salons that pay commission or a high hourly rate may find most reported tips are creditable. Salons that run payroll on minimum wage plus tips should run the monthly math.
Booth renters: tenant or employee?
Many salons rent chairs or suites to independent stylists. Done right, the stylist runs her own business and the salon is a landlord. Done wrong, the IRS sees employees on a lease.
There is no special statute for cosmetologists the way IRC 3508 covers real estate agents. The common law test applies. The IRS groups the evidence into behavioral control, financial control and the type of relationship. In a salon, the facts that matter tend to be:
- Who sets the stylist's prices and schedule.
- Whose clients they are, and who books them.
- Who collects the payment: the stylist directly, or the salon's register.
- Who buys the products and tools.
- Whether the stylist pays a fixed rent regardless of income, or the salon takes a percentage of services.
A stylist who pays a flat weekly rent, sets her own prices and hours, books her own clients, collects her own payments and buys her own supplies looks like a tenant. A "booth renter" who is booked by the front desk, rung through the salon's register and paid a commission looks like an employee. If the IRS reclassifies, IRC 3509 sets reduced rates for income tax withholding and employee FICA if the required information returns were filed, doubled if they were not, plus the employer's own FICA. See our worker classification guide for Section 530 relief and the Voluntary Classification Settlement Program.
Rent is income
Booth rent you collect is income to the salon. Rent is one of the payments listed in IRC 6041(a), so a booth renter operating as a business who pays you $2,000 or more in rent during 2026 may be required to report it to the IRS. Report all of it. Unreported booth rent is easy for an examiner to find, because the renters deduct it.
The tip deduction for stylists
The new IRC 224 deduction for qualified tips, available for tax years 2025 through 2028, covers beauty occupations. Treas. Reg. 1.224-1(h) lists, among others, skincare workers (code 601), massage therapists (602), barbers, hairdressers, hairstylists and cosmetologists (603), shampooers (604), manicurists and pedicurists (605), eyebrow and eyelash technicians (606) and makeup artists (607).
For employees, the salon's W-2 must show cash tips reported under section 6053(a) and the employee's occupation, under IRC 6051(a)(18). For booth renters paid through card processors or apps, Public Law 119-21 added reporting of tips and occupations to Forms 1099-NEC, 1099-MISC and 1099-K. Notice 2025-62 gave penalty relief for 2025 to payors who did not separately report those items.
For self-employed stylists, the regulation adds a limit. Under Treas. Reg. 1.224-1(e), qualified tips received in a non-employee business are deductible only to the extent the business's gross income, including the tips, exceeds its other deductions. The regulation's example is a self-employed manicurist with $75,000 of gross income, including $20,000 of tips, and $60,000 of expenses: the tip deduction is limited to $15,000. The general $25,000 cap and income phase-out under section 224(b) also apply.
A mandatory service charge is never a qualified tip. Treas. Reg. 1.224-1(c)(4) says amounts automatically added to a customer's bill are not qualified tips even if distributed to workers, and a card screen that forces a minimum tip makes only the excess over the minimum a qualified tip. More on that in our guide to the new tip rules.
Commission stylists on payroll
Many salons pay employee stylists a commission on services instead of an hourly wage. Commission is still wages. It runs through payroll with withholding and employer FICA, and the stylist's reported tips are added on top. For the FICA tip credit, the monthly test compares cash wages, including commission, to $7.25 times hours worked, so a stylist whose commission alone clears that amount makes every reported tip creditable. Keep hours records for commission employees for exactly that reason. Without hours, the credit computation has no denominator.
Review this mix once a year. Stylists move between employee and booth-renter arrangements, services change and tips shift from cash to cards. Each change can move a person from one set of rules to another, and the paperwork should move with them.
The cash business side
Salons take cash. Deposit it intact, reconcile the appointment system to deposits and card settlements, and make sure gross receipts on the return at least equal the Forms 1099-K you receive. See our 1099-K guide. The firm's small business IRS problems guide explains how it approaches salon owners already in trouble.
Employer, landlord, cash business. Know which hat you are wearing for each person in the building, and keep the paperwork that proves it.