FICA Tax Credits for Salons, Barbershops, and Spas

Why the tax credit that has long benefited restaurant employers should be extended to the beauty industry

Since 1993, the food service industry has benefited from the FICA Tip Credit, legislation that helps offset income tax liabilities for restaurant-based employers. Tips also make up a large percentage of salon and spa employees’ income, yet beauty industry employers are currently ineligible for the FICA Tip Credit.

The Professional Beauty Association is leading the charge toward cross-industry parity by advocating to extend this credit to beauty service providers. If successful, this legislation would provide financial relief to salon owners — many of whom are women and minorities — who could, in turn, spend these tax savings on business improvement efforts and other initiatives.

What is the FICA tax tip credit?

The Federal Insurance Contributions Act tax, or FICA, is a shared tax — paid in equal parts by employers and employees — that helps fund Social Security and Medicare programs. 

Because FICA applies to all taxable compensation, service-based tips are included in the “amount owed” calculation. This condition places a financial burden on service industry employers: While customer-paid tips constitute a large percentage of employee income, the employer doesn’t directly benefit from that income, and yet, they are required to pay taxes on it. Historically, this has led to the underreporting of tip income. In 1993, the FICA Tip Credit was introduced to provide tax relief and increase tip reporting among restaurant employers. 

In its simplest form, the FICA Tip Credit states that restaurant industry employers can file for a dollar-for-dollar income tax credit for FICA taxes they paid on employee tips. Some additional conditions must be met, most notably that employers can only claim credit for tip income that exceeds the statutory amount of $5.15 (i.e., the former federal minimum wage, and the rate still used for FICA credit purposes). In other words, if an employee makes less than $5.15 per hour, the employer will not get credit on any tip earnings required to bring that employee up to the minimum level; tip earnings beyond that amount would be eligible for the credit, thus allowing for substantial savings on the part of employers.

At present, this tax credit is available only to the restaurant industry. However, efforts are underway to extend this legislation to other service-based industries.

Why is the FICA tax tip credit important?

By taking advantage of the FICA tip credit, employers can retain some of the funds that they would otherwise have spent on taxes, and instead cycle those dollars back into their respective businesses. These investments could take the form of capital improvements; technology solutions that increase efficiency and improve the customer experience or the hiring and training of new staff, among other operating costs.  

Access to additional funds is especially important given the negative impact of COVID-19 on the service industry. With the return to relative normalcy, the beauty industry has begun to rebound; however, supply chain issues and staffing shortages have presented ongoing challenges. For employers, access to the FICA tax credit could help aid in the ongoing recovery process by defraying the rising costs of business ownership and supporting plans for the future.

The FICA tip credit is also beneficial in that it promotes more accurate and complete tip reporting, thus keeping employers in compliance with tax law. Employees too can benefit from increased tax compliance: by paying the full and accurate amounts into Social Security via FICA, their retirement benefits will increase as well — a long-term consideration, perhaps, but an important one nonetheless.

It’s also important to note the demographic-specific impacts this legislation would have on the beauty industry. With 60% of salons women-owned and 34% minority-owned, the tip credit would provide a substantial boon in the movement to support women- and minority-owned businesses.

How can people get involved?

The Small Business Tax Fairness and Compliance Simplification Act was introduced by Rep. Suzan DelBene (D-WA) and Rep. Darin LaHood (R-IL) in February 2021. If passed, this legislation would extend the FICA Tip Credit to the beauty service industry. You can join the Professional Beauty Association (PBA) in their efforts to get this bill passed by sending an email to your Members of Congress and asking them to include the FICA Tax Tip Credit in legislation this year. 

You can also help amplify this message by using PBA’s online toolkit, which includes an issue summary; a template letter to your Congresspersons; and shareable graphics to help spread the word via social media and other platforms of influence. Remember to tag #FICAforSalons in your social posts! Finally, you can make a donation to support PBA’s advocacy efforts.

The beauty industry is on a path toward continued growth. It’s time for the tax code to catch up and for parity to be established across tip-based industries. Let’s support the Professional Beauty Association and help get the Small Business Tax Fairness and Compliance Simplification Act enacted!