|
|
Proposed bipartisan legislation would provide equitable tax treatment for law-abiding salon owners; make salon industry more professional.
WASHINGTON, D.C. - October 20, 2000 - In a move to provide equitable tax treatment to law-abiding salon owners, the "Cosmetologists' Tax Fairness and Compliance Act of 2000" was introduced in Congress today. The legislation extends the same tax fairness provision applied to the tip-intensive restaurant industry to cosmetology. It permits salon owners (just like restaurant owners) to claim a credit against their income tax for the employer's share of FICA (Social Security and Medicare) tax paid on tips paid to their employees in connection with "the providing of cosmetology services for customers or clients if the tipping of employees providing such services is customary."
Under present law, salons are required to pay FICA taxes on tips paid to their employees, even though the employers do not pay the tip compensation to the employees or control the amount of tip compensation paid to the employees.
The credit would be allowed only for FICA tax on tips paid to employees. It would not be allowed for SECA tax (Social Security and Medicare tax paid by the self-employed) paid by individual salon owners and independent contractors on tips that they receive.
Representative Nancy Johnson (R-CT) introduced the Act in the House of Representatives, and Senator Rick Santorum (R-PA) introduced it in the Senate. The House bill is cosponsored by Rep. Bob Matsui (D-CA). While Congress is not expected to act on the legislation in the waning days before adjournment, the legislation lays down a marker for reintroduction after the first of the year and a concerted push to enactment.
In addition, the Act will also help to correct the problem of systemic tax evasion in the cosmetology industry. The proposed legislation would close a loophole in a group of tax compliance provisions that are intended to encourage everyone to comply with the tax law. Under present law, when an independent contractor provides services to a business, the business generally must provide the independent contractor with a Form 1099 and the IRS with the information contained in the Form 1099. This is vital information for the IRS because the form tells the Service the address and taxpayer identification number (TIN) of the independent contractors. The IRS can then check to see if tax returns were filed by them.
However, under present law, Forms 1099 are not provided to cosmetologists who are independent contractors because they are technically providing their services to individual customers, rather than to businesses. The legislation requires salon owners (and others who lease space to hairstylists and other cosmetologists) to provide a type of Form 1099 to stylists and other cosmetologists operating as independent contractors on their premises and to provide the IRS with the names, addresses and TINs of the independent contractors. It also requires salon owners (and other lessors) to provide a type of Form 1099 to independent contractors and the IRS. It also requires owners to provide a copy of an IRS publication describing the tax obligations of independent contractors. The IRS’s Publication 3518 Beauty Industry Federal Tax Guidelines can be used for these purposes. No extra paperwork is required by the independent contractor.
“This is an issue of fairness," says Representative Johnson. “The restaurant industry gets a tax benefit for tips reported by its employees, as it should. This legislation simply extends the same tax fairness provision to the other major industry in which tip income is commonplace, cosmetology. It also ensures that legitimate salons are not undercut by those who either underreport — or simply don’t report — tip income."
The legislation dovetails with a priority effort launched by the IRS several years ago to track down tax cheats in the cosmetology industry. The salon industry is working closely with the Service in support of their effort in the field and to ensure that legitimate salons are not unfairly targeted for more stringent compliance than others in the industry simply because they are easier to find. Nothing in this bill will inhibit the rights of legitimate booth renters who are already operating their businesses in accordance with current tax laws to continue to do so.
“I am pleased to have worked with Rep. Nancy Johnson to introduce this legislation, which will help to extend tax equity and compliance fairness to the cosmetology industry," says Senator Rick Santorum. “First, it will put the tip-intensive cosmetology industry on an equal footing with the restaurant and food delivery industries. Salon owners should not be asked to pay tax on tips that others choose to pay to their employees. Second, the Cosmetology Tax Fairness and Compliance Act will make great strides toward solving the widespread tax cheating that currently occurs in the professional salon industry. While Congress is not expected to act on this legislation in the waning days before adjournment, I am anxious to raise the awareness of these issues so that we can reintroduce this bill in the 107th Congress and make a concerted push for its enactment."
“For the first time in the history of our industry, this Act provides law-abiding salon owners with equitable tax treatment," say Malcolm Bonawits and Frank Schoeneman, co-chairs of the International Chain Salon Association’s Government Relations Committee. “Currently, thousands of salon owners who pay their taxes, are placed at a competitive disadvantage by a minority of the beauty industry who underreport or do not report their revenues and tips. Legitimate law-abiding salon owners and legitimate ‘booth renters’ are hurt when stylists leave to become illegal ‘booth renters,' believing that their take home pay will increase because they won’t report all (or any) of their revenues and tips."
"The illegal, underground economy hurts legitimate salons who have to replace the departed stylist, as well as losing the customers who follow the stylist to the underground economy. Beauty schools are also hurt by losing students who cannot access federal student loans because Federal statistics distort the relationship between beauty school graduates and the number of persons actually employed as hair stylists. The result is a smaller pool of graduating stylists for legitimate salon owners to recruit from." Adds Frank Zona, president of The Salon Association and owner of Zona Salons, "This moment is one of the most important collective efforts undertaken by salon owners, not just because of the common sense of the bill itself, but because it indicates salon owners' growing desire and ability to work together to affect change.""This is a HUGE example of the victories we can achieve for the professional salon industry when all segments work together," says Mark Gross, president of the Professional Beauty Federation (PBF). "Currently, the IRS permits restaurants and food delivery businesses to claim a credit against their income tax for the employer's share of FICA tax paid on tips paid to their employees. When PBF members ICSA and The Salon Association determined that the same credit should be available to salon owners, they had the full support of the manufacturers, distributors and schools who comprise the rest of the PBF membership. As a result, this Act will ensure that the professional salon industry receives the same benefits. Now, we all must ensure this legislation is passed by joining forces in a letter-writing campaign and show our grassroots reach by writing to our respective U.S. Senators and Congresspeople and ask for their support."
"The ICSA, TSA and the IRS have been working together to solve compliance problems for more than two years," explains Dan Coniglio, president of the ICSA. "In fact, many salons have increased their efforts to comply with tax laws by training their employees on their obligations to report tips and by establishing procedures for the employees to report tips. Many of these salons have entered into Tip Reporting and Compliance (TRAC) agreements with the IRS. We have continuously worked to keep our ICSA members educated and informed about what is required of them. And while we have complied, we have been at a disadvantage to those who do business illegally - either by choice or by lack of information. Finally, this Act will place all salons on equal footing. That's all we ask."
Salon owners should have little difficulty complying with the new requirement. It only asks salon owners to mail to each independent contractor a publication provided by the IRS and a standard form stating that the independent contractor's name, address, and TIN has been provided to the IRS. In addition, they will provide a list of such information to the IRS. This information should be readily available to the salon owner. The Forms should be easier to complete than current IRS Forms in the 1099 series because the salon owners would not be required to determine or report the amounts paid to the independent contractors.
For sample letters to send to your
U.S. Senators and Congresspeople in support of this legislation, go to www.probeautyfederation.org/HR2100/StateRepEmail.htm