December 19, 2022
By April L. McDaniel, CPA, CRSP
Since Tippy was founded, I’ve had the pleasure of writing for and consulting with their team numerous times. Kopsa Otte and Tippy share in the commitment to educating the beauty industry on taxing tips and being good business-people.
As a CPA in one of the only Accounting & Tax Firms that specializes in the Beauty Industry, I see a lot of owners’ doing this wrong. The term “owner” includes solo artists and managers of large employee-based teams. Quite honestly, this area of tax is low hanging fruit for auditors. Yet, for some reason many business owners do not think they are looking. I think it’s only a matter of time. Congress and the IRS continue to work to increase what is called a “matching document” that allows them to check critical numbers on the tax return with outside forms.
Here are a few examples:
- The form W-2 and W-3 has a box for tip income. If you work in an industry where tipping is common, and your business accepts tips than there should be numbers in the box for tips.
- The 1099 -K. The 1099 -K is used for a variety of things but most recently cash apps have been added to the list. Payments that exceed $600 received in a cash app will trigger a 1099 -K to be issued. The IRS will be looking to match that income on the return. UPDATE: December 27, 2022 – The IRS has delayed implementation of the 1099-K for cash apps to transactions happening after 2022. The existing 1099-K reporting threshold of $20k in payments from over 200 transactions remains in effect for payments made in 2022.
- The 1099-K is also used to report credit card processing. The IRS expects that you have some cash business. If the total gross receipts reported on your business schedule or business return does not provide for some cash income above and beyond what is reported on the 1099 issued by your merchant processor that is a red flag. This is what I mean by low hanging fruit.
What can you do as a business owner? Here are some steps for you to prepare for the tax year end:
- Use a software like QuickBooks Online to keep track of your business income and expenses.
- Set up a separate bank account and credit card account for business activity. Don’t use it for personal.
- Spend a few hours per week on your business. It’s so much easier to do it each week than to wait until you’re up against a deadline.
- Consider discussing estimated tax payments with your tax preparer. This helps with cash flow because you make payments called estimates to the IRS throughout the year instead of waiting until Tax Day.
- If you extend your tax return, remember this is an extension to file – it is NOT an extension to pay. Penalties and interest are due if you end up owing and you did not make estimates and/or an extension payment.
- Make sure you are keeping track of retail that you use as back bar. Use tax is due in most states in this scenario.
- Collect, remit, and file your sales tax reports as required by your state.
- Tips include gifts, cash, credit cards, cash app income. All tips are subject to FICA tax.
a) Employees: If you are an employee than all tips should be reported to your employer and should be on your W-2. The employer pays half the FICA, and you pay the other half.
b) Self-employed: You will report on your tax return. Discuss this with your tax preparer.
- Knowledge is Power AND What you can measure, you can manage. If you are not paying attention it’s impossible to plan to save on taxes.