If you own or work at a barbershop or hair salon, there may be tax deductions that you can take advantage of this tax season.
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If you own a barbershop or hair salon — or if you cut and color hair as an independent contractor — you may be wondering how income taxes for hair salons work. Did you know there may be certain business deductions and credits you can claim?
If you're a salon or barbershop owner, you're most likely self-employed unless you have incorporated your business. 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.
Employees often have federal income tax withheld from their paychecks as well as Social Security and Medicare payroll taxes. That said, self-employed business owners and independent contractors have to save up and pay federal income taxes and self-employment taxes themselves by making quarterly estimated tax payments using Form 1040-ES.
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:
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.
You may qualify for a home office deduction if you have a dedicated space where you conduct business in your home. To qualify for the deduction, the area can’t be used for personal purposes.
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.
Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used. The new rules allow for 100% bonus "expensing" of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. 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.
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 need to be enrolled at an eligible educational institution that participates in a student aid program run by the U.S. Department of Education. You'll likely 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 business expense deduction for the money you spent on education if you're self-employed or an independent contractor.
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 4137 to 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 third-party payment processors such as Venmo and PayPal, you might receive a 1099-K. Payers will also send these forms to the IRS to report your income.
The IRS planned to implement changes to the 1099-K reporting requirement for the 2023 tax year. However, the IRS recently delayed the implementation of the new $600 reporting threshold for transactions from third party processors like Venmo and Paypal, reverting tax year 2023 back to the previously higher 1099-K reporting threshold (over $20,000 in payments and more than 200 transactions).
However, some individual states have already begun to use the lower reporting threshold. Maryland, Massachusetts, Vermont, Virginia and the District of Columbia have a $600 threshold for requiring 1099-K in effect for 2023. North Carolina and Montana also have a $600 threshold, although state tax officials have said these states may offer relief. If you don’t receive a 1099-K, the IRS still expects you will report all your income, regardless of the amount.
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