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Tax Tips for the

COSMETOLOGY

BARBER INDUSTRY

W

hether a shop owner, an employee, or a booth renter (in-

dependent contractor), you need to know your federal tax

responsibilities, including how to report your income and

tips you receive from your customers.

The most common forms of business are the sole proprietorship, part-

As a shop owner you can elect to structure your business in different

forms. You can choose to operate your business as a sole proprietor-

ship, partnership, or as a corporation. Your business may have employ-

ees who work for you or you may decide to operate without employees.

Another common arrangement is renting space to another individual

who operates an independent business. This is commonly referred to as

a booth renter and will be discussed later in this publication.

It doesn’t matter which business structure you choose; there are basic

principles that do not change. Income received in the course of your

business is taxable income and must be reported on the appropriate

and Schedule SE to report Self-Employment tax.

Once you decide to hire workers you must make a determination if they

are your employees or if they will operate their own independent busi-

ness (booth renters).

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Table of Content

Shop Owner

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Simply stated, an employee is an individual who works at the control

and direction of another. It is important to remember that as the em-

ployer you do not have to control the worker all of the time, you simply

have to have the right to control. The following questions are helpful in

determining if someone is your employee or an independent contrac-

tor:

supplies, then more than likely you are the employer and the worker is

your employee. For additional information, see Publication 1779, Inde-

pendent Contractor or Employee?

Shop Owner/Employer Tax Responsibilities

As an employer, federal law requires you to withhold taxes from your

employees’ paychecks. Depending on the wages, you must take out of

your employees’ paychecks certain amounts for federal income tax, so-

cial security tax, and Medicare tax. You must then pay any liability

for the employer’s share of social security and Medicare taxes. This

portion, your share, is not withheld from employees. You may also be

Return. You may also be required to file an annual form to pay Fed-

eral unemployment taxes. This is done by filing Form 940, Employer’s

Annual Federal Unemployment (FUTA) Tax Return. Form W-2 is fur-

nished to employees after the close of the calendar year, but no later

than January 31st.

For more information about payroll taxes, see Publication 15 (Circular

E), Employer’s Tax Guide that you can download at

www.irs.gov/businesses and click on the Employment Taxes link.

A booth renter is someone who leases space from an existing business

and operates their own business as an independent contractor. As a

Indications that you are an independent contractor include, but are not

limited to:

If these factors are not present, then you are likely an employee of the

business who is providing the space to you.

If the above factors are present, then as an independent contractor you

would be responsible for your federal taxes. Your tax responsibilities

would include:

tax return form, such as Form 1040, using Schedule C or Schedule

C-EZ. Social Security and Medicare Taxes are reported on Schedule

timated tax payments during the year to cover your tax liabilities. This

is because as a booth renter (independent contractor), the business does

not withhold taxes from your pay. Estimated tax is the method used to

pay tax on income that is not subject to withholding, such as earnings

from self-employment you receive as a booth renter.

Estimated tax payments are made each quarter using Form 1040-ES,

Estimated Tax for Individuals. For additional information regarding tax

withholding and estimated tax, see Publication 505, Tax Withholding

and Estimated Tax.

If you hire others to work for you it is possible that these workers would

calendar year.

Booth Renters

Tip Income Responsibilities for

the Employer or Booth Renter

Tips are considered taxable income and are subject to Federal income

taxes. Tips that your employee receives from customers are generally

subject to withholding. Your employees must report tips they receive to

you by the 10th of the month after the month that the tips are received.

The report should include tips that you paid over to the employee from

customers that added the tip to their charged or debit card receipt and

receive. The IRS furnishes free, Publication 1244, Employee’s Daily Re-

cord of Tips and Report to Employer, which employees can use to re-

cord their tips on a daily basis. Publication 1244 includes Form 4070,

Employee’s Report of Tips to Employer and Form 4070A, Employee’s

Daily Record of Tips.

If you operate your own business as a sole proprietor or booth renter,

any tips received in the normal course of your business must be re-

ported in gross receipts, and then reported on the appropriate income

tax form.

See Publication 531, Reporting Tip Income, for more information re-

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