by Michael Lodge
If you are renting a booth as a hair stylist or own a full shop, there are tax and accounting issues that you have to take into consideration.
Tips for the Cosmetology and Barber Industry
- Business Structure. One of the first things you need to decide is the type of structure for your business. The most common types are sole proprietor, partnership or corporation. You may have employees or rent space to someone who is self-employed.
- Report Tip Income. All tips you receive are taxable income. If you have employees who receive $20 or more in cash tips in any one month, they must report them to you. You must withhold federal income, Social Security and Medicare taxes on the reported tips. If you are renting a booth at a shop, you must keep track of your personal tips received from clients and report it as income on your tax return. You may think that since it is cash it should not be reported, but if you are audited the IRS will look at your bank account to see if there were cash deposits. So report them and be safe.
- Business Expenses. You can deduct ordinary and necessary expenses that you pay to run your business. An ordinary expense is a common and accepted cost for that type of business. A necessary expense is a cost that is proper for that business. For example, cosmetologists are often required to get a license or pay for a permit or certification. See Publication 535, Business Expenses for more on this topic. Talk with your tax accountant and get a better understand on what is an allowable expense.
- Estimated Tax. If you are self-employed you may need to make estimated tax payments each year. If you do not pay enough tax during the year, you may owe a penalty. Use Form 1040-ES, Estimated Tax for Individuals to figure the tax. Direct Pay, available on IRS.gov, now offers you the fastest and easiest way to make these payments. Work with your tax accountant.
- Depreciation of Assets. You can deduct the cost of some assets over a number of years. For example, if you buy equipment and furniture, you should depreciate the cost of those items since you will normally use them for more than one year. Check out the IRS webinar Depreciation Basics to learn more. Your tax accountant will be able to look at the assets your are purchasing and determine what is an expense and what is an asset to depreciate.
- Filing Your Taxes. If you have employees, the IRS offers electronic filing options for your federal payroll tax returns. IRS e-file is fast, safe and accurate. You’ll also receive an electronic acknowledgment when the IRS accepts your e-filed return. You can use EFTPS to make any federal tax payments. Make sure you file your tax returns on time, work with your tax accountant at the end of the year and early on at the beginning of tax season.
- Keeping Records. Everyone in business must keep records. You must have good records to support the income, expenses and credits that you report. Good records can help you keep track of your business. They can also increase the likelihood of business success. Keep your business records stored in a safe place, even upload it to a file in the cloud. If you have a question on record keeping work with your tax accountant to put in place a good record keeping system.
If you have further questions on this issue call our office at: 877.778.1770 and visit our web site at: www.icontaxgroup.com