If you own a barbershop or hair salon — or if you cut and color hair as an independent contractor — you may be wondering how hair salon taxes work. Did you know there may be certain business deductions and credits you can claim?
Self-employed vs. independent contractor vs. employee
If you’re a salon or barbershop owner, you’re self-employed. But it isn’t as clear-cut for the stylists and barbers who work at these businesses. Thankfully, there are a couple of easy ways to tell if you’re an employee or an independent contractor.
- Independent contractors: Generally, if you completed a Form W-9 and received Form 1099-NECduring tax season, you’re considered an independent contractor.
- Employees: If you completed Form W-4 and received Form W-2 during tax season, you’re considered an employee.
Employees should have their federal income tax withheld from their paychecks. That said, self-employed business owners and independent contractors have to save up and pay federal income taxes and self-employment taxes themselves. Most self-employed people and independent contractors may submit federal income tax and self-employment tax payments to the IRS by making quarterly estimated tax payments using Form 1040-ES.
Deduction options for salon and barbershop owners
Salon and barbershop owners have several tax deduction options to help lower tax bills.
Depreciation and bonus depreciation
When you buy something for your business that is expected to last for years, such as furniture, you can’t traditionally qualify it as an expense. Instead, you can deduct the cost of the asset over a few years through a process called depreciation. Different assets depreciate over a varying number of years depending on how they’re classified.
A recent change from the Tax Cuts and Jobs Act, 100% bonus depreciation is a relatively new concept that allows you to fully depreciate certain assets in the year they are placed into service. Essentially, it allows you to elect to depreciate the entire cost of any qualifying equipment you buy for your business upfront. In general, common assets that may qualify for bonus depreciation include both new and used assets you purchase that are expected to last fewer than 20 years. This can save you significant money on taxes.
Originally, 100% bonus depreciation was introduced for equipment put into service after September 27, 2017. The bonus depreciation percentage was set to decrease over a few years beginning in 2023. Recent federal tax law changes extended 100% bonus depreciation to remain in effect through the 2026 tax year. But, some states do not conform to these changes. The state where your business is located may or may not allow bonus depreciation.
The IRS also offers a de minimis safe harbor election, which allows you to deduct the expense of a necessary piece of equipment instead of depreciating it if it costs $2,500 or less. You can deduct the expense of items that cost up to $5,000 if you have an applicable financial statement for them. You’d include this expense in the supplies line item on Schedule C if you’re filing as a self-employed person.
TurboTax can help you determine which purchases must be depreciated instead of expensed. They can also help you calculate depreciation or bonus depreciation for your business’s depreciated assets. TurboTax does this by asking a few simple questions. Then, they take care of reporting the information on the proper tax forms for you.
Other common hair salon tax deductions to consider
Hair salons and barbershops have a long list of deductions that they may qualify for to help lower their federal income tax burden. Common expenses you may want to consider deducting include:
- Advertising
- Car and truck expenses
- Commissions and fees
- Contract labor
- Employee benefit programs
- Insurance
- Interest
- Legal or professional services
- Office expenses
- Pensions or profit-sharing plans
- Rent or lease expenses
- Repairs and maintenance
- Supplies
- Taxes and licenses
- Travel and deductible meals
- Utilities
- Wages
- Other qualifying expenses
You may even qualify for a home office deduction if you have a dedicated space where you conduct business in your home. Keep in mind that to qualify for the deduction, the room can’t be used for personal purposes.
Hairstylists and barbers may qualify for education tax credits
If you’re taking professional training to acquire or improve job skills to further your career as a stylist or barber, you may be able to qualify for the Lifetime Learning Credit. The credit can be up to $2,000 per tax return to cover qualifying tuition and related expenses for you, your spouse, or a dependent on your tax return. A tax credit like this one is preferable to a tax deduction because it lowers the tax you pay instead of your income, as a deduction would.
To qualify for this credit, you must be enrolled at an eligible educational institution that participates in a student aid program run by the U.S. Department of Education. You’ll know if your educational institution qualifies if they send you a Form 1098-T for the tuition payments you made. You can also ask the school if they qualify. If your school doesn’t qualify, you may be eligible for a deduction for the money you spent on education if you’re self-employed or an independent contractor.
Don’t forget to report tip income
Employees are supposed to report their tip income to their employers who then include it on your tax documents. If you report all of your tips, they should already be accounted for on your Form W-2, which you input into your tax return. But sometimes tips go unreported. In this case, you have to fill out Form 4137to report the tip income you didn’t report to your employer. This form includes unreported tips in your income and calculates any unpaid Social Security and Medicare tax that’s due.
Self-employed salon owners and independent contractors should include any tips they personally receive in the income they report on their tax returns.
And if you receive payments through online payment services such as PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report your income.
Under the American Rescue Plan, changes were made to Form 1099-K reporting requirements for for third-party payment networks like Venmo and Cash App that process credit/debit card payments or electronic payment transfers. The change begins with transactions starting January 2022, so it doesn’t impact 2021 taxes. Beginning with tax year 2022 if someone receives payment for goods and services through a third- party payment network, their income will be reported on Form 1099-K if $600 or more was processed as opposed to the current Form 1099-K reporting requirement of 200 transactions and $20,000. This change could impact people working in the gig economy, online sellers, independent contractors, and other self-employed business owners.