Written for owners of hair salons, barbershops, beauty, nail, lash and brow businesses, spas and massage, tanning, tattoo and piercing studios and med spas in the United States.
The short version
- Claim the FICA tip credit on employee tips.It now covers beauty services. Leave out tips needed to bring wages up to the federal minimum, then claim on Form 8846.
- Pay sales or use tax on back-bar.Use your resale certificate only for retail stock. Product you use up in services counts as your own use.
- Check whether your city taxes services.Ordinary salon services are generally untaxed in California, Texas and Florida, but New York City charges its city sales tax on them.
Tips are wages for your employees, and for tax years beginning after December 31, 2024 they can earn your salon the FICA tip credit, which is no longer only for restaurants. On the other side, two sales tax rules catch salons out: tax on product you use up in services, and city tax on services in New York City.
Tip reporting
An employee who receives $20 or more in tips in a month reports them to you by the 10th of the next month, on Form 4070 or the POS report. You withhold income tax and the employee's FICA on them and pay employer FICA. Card tips paid through payroll are already reported. The 8% allocated-tips rule applies to large food or beverage establishments, not salons. As of Oct 2026.
IRC 6053(a)
The Section 45B credit now covers beauty
For tax years beginning after December 31, 2024, a business providing customarily tipped beauty services (barbering and hair care, nail care, esthetics, and body and spa treatments) can claim a credit on Form 8846 for employer Social Security and Medicare tax paid on creditable employee tips. For beauty employees, tips used to bring wages excluding tips up to the federal minimum wage of $7.25 an hour are not creditable. You cannot also deduct the FICA you take as a credit, and booth renters' tips are not your wages, so they earn no credit. As of Oct 2026.
IRC 45B; Form 8846 instructions
Two different tip credits: the wage tip credit lets you pay a $2.13 cash wage where tips make up the rest of $7.25 and the employee is told the rules (29 U.S.C. 203(m)), and California, Minnesota, Nevada, Oregon, Washington, Alaska and Montana allow none. The FICA tip credit is the Section 45B tax credit above. As of Oct 2026.
| Tips reported over 1,500 hours worked | $20,000 |
| Less tips needed to reach $7.25 an hour on a $2.13 cash wage: ($7.25 minus $2.13) x 1,500 | -$7,680 |
| Creditable tips | $12,320 |
| Section 45B credit | $942.48 |
$12,320 x 7.65%A Los Angeles salon paying the city minimum of $18.42 (from July 1, 2026) with no tip credit gets the credit on all $20,000: $1,530.00. The 7.65% employer FICA rate is subject to the Social Security wage base. As of Oct 2026.
No tax on tips is income tax only
For tax years 2025 to 2028, an employee or self-employed worker in an occupation that customarily received tips can deduct up to $25,000 a year of qualified tips from federal income tax, reduced by $100 for each $1,000 of modified adjusted gross income above $150,000 ($300,000 married filing jointly). Tips still carry FICA, and state income tax follows each state's own rules. You report qualified tips and the occupation on the W-2. As of Oct 2026.
IRC 224
1099s for stylists who are not employees
File Form 1099-NEC for a non-employee stylist you pay $2,000 or more in a year, for payments from January 1, 2026; the line was $600 before, and it is indexed for inflation from 2027. W-2s and 1099-NECs are due by January 31. A booth renter paying rent to a salon that is not a corporation reports the rent on Form 1099-MISC at the same $2,000 level, and in California issuing that 1099 to the salon is one of the conditions of the cosmetology exemption from the ABC test. Collect a W-9 before the first payment. As of Oct 2026.
IRS Instructions for Forms 1099-MISC and 1099-NEC (2026); California Lab. Code 2778
Sales and use tax
Back-bar product is your own consumption. For example, a Tampa salon that bought $12,000 of back-bar color on its resale certificate owes use tax on the $12,000; self-assess it before an audit does.
Ordinary hair, nail and skin services are generally not taxed in California, Texas or Florida. New York City is different: it charges its 4.5% city sales tax on beauty, barbering, hair restoring, manicuring, pedicuring, electrolysis, massage and similar services, with no state tax on them, while products sold in the city carry the combined 8.875% (NYC Admin. Code 11-2002). For example, a $100 cut carries $4.50 and $30 of shampoo $2.66. A salon that never charged the city tax owes it out of its own pocket for every open year. As of Oct 2026.
Ask your CPA or enrolled agent to set up W-2 tip and occupation reporting with your payroll provider before year end.
Asked in Greymill
The FICA tip credit (Section 45B) now covers beauty, for tax years beginning after December 31, 2024.
Tips needed to bring their wage up to the $7.25 federal minimum (As of Oct 2026) don't count:
Tips needed: ($7.25 minus $2.13) x 1,500 = $7,680
Creditable tips: $20,000 minus $7,680 = $12,320
Credit: $12,320 x 7.65% employer FICA = $942.48 (As of Oct 2026), claimed on Form 8846
You can't also deduct the FICA you take as a credit.
Back-bar color: a resale certificate covers retail stock only. Color used up in services is your own use, so you owe sales or use tax on it.
Work out what you owe and pay it before an audit finds it.
Take both to your CPA or enrolled agent; I can list the questions to ask.
Ask it about your own business
Paste this into Greymill with your own figures, and Tax & Bookkeeping works it through for your business.
I run a salon or beauty business in [state], in the US. I have [number] W-2 employees paid [cash wage or hourly rate] who reported [total tips] last year over [hours worked], [number] non-employee stylists paid [amounts], and [number] booth renters. I buy [amount] of back-bar product a year, [on a resale certificate or with tax paid]. Work out my Section 45B credit for the year, tell me which 1099s I must file, whether I owe use tax on back-bar product and whether my services are taxable where I am, and list the questions to take to my CPA.
More for beauty, hair and aesthetics in the US
- Pricing a color service so it still pays after commission and productPrice each service from the provider's time and product, check what commission leaves you, and track service sales per available hour before you change the menu.Read the lesson
- We sold a stack of gift cards in December. Why is cash tight now?Gift card and deposit money is service you still owe, no-shows are hours you never get back, and a 13-week cash view shows both before they hurt.Read the lesson
- Adding laser, microneedling, injectables or tattoos: whose license covers it?Every state licenses the person and the shop separately, scope of practice decides what an esthetician may do, and injectables, and in most states lasers that affect living tissue, are the practice of medicine.Read the lesson
- Memberships, auto-renewals and no-show fees: will my terms hold up?Memberships, deposits and no-show fees are lawful when the client agrees to clear terms up front, and auto-renewal laws spell out how sign-up and cancellation must work.Read the lesson
- Commission stylists, '1099' stylists and booth renters: am I underpaying or misclassifying?A booth renter must really run their own business, and every commission employee needs a minimum wage and overtime check each workweek.Read the lesson
- Getting more five-star reviews and Instagram bookings without breaking FTC rulesRebooking, reviews, portfolios and texts bring in salon clients, and each comes with federal rules on incentives, endorsements, photos and consent.Read the lesson
- A client was burned, reacted or had an injectable complication: what do I do today?The first hours after a burn, reaction or injectable complication decide the client's outcome and whether your insurance responds, so act in order and admit nothing.Read the lesson
Open the interactive lesson · Every beauty, hair and aesthetics lesson · What Greymill knows about the trade
Sources
The primary sources behind this lesson, checked Oct 2026.
- IRC 6053(a); Form 4070 (Tips, FICA and the section 45B credit)
- IRC 6053(c) (Tips, FICA and the section 45B credit)
- 2025 Form 8846 instructions, Who Should File, How the Credit Is Figured, Line 2 and Line 4 (Tips, FICA and the section 45B credit)
- IRC 224; final regulations (Tips, FICA and the section 45B credit)
- IRC 1401 and 1402; IRC 6654 (Booth renters, 1099S and sales tax)
- 2026 Instructions for Forms 1099-MISC and 1099-NEC, What's New and Form 1099-NEC filing rule (Booth renters, 1099S and sales tax)
- NYC Admin. Code 11-2002; TSB-A advisory opinions (Booth renters, 1099S and sales tax)
- state agency guidance (Booth renters, 1099S and sales tax)
- New York City Department of Finance, Business NYS Sales Tax (Booth renters, 1099S and sales tax)
- City of Los Angeles Office of Wage Standards, current minimum wage $18.42 effective July 1, 2026 (Tax hard cases)
- California DIR 2026 rate; New York DOL 2026 minimum-wage poster; FloridaCommerce 2026 minimum-wage poster, including $3.02 tip credit (Wage and hour on commission and tips)
- Wage Order 2 sec. 3(D); Vaquero v. Stoneledge Furniture (2017) 9 Cal.App.5th 98 (Wage and hour on commission and tips)
- 29 U.S.C. 203(m) (Wage and hour on commission and tips)
- NY DOL, Minimum Wage for Tipped Workers; 12 NYCRR Part 142 (Wage and hour on commission and tips)
- 29 C.F.R. 531.35; Lab. Code 2802 (Wage and hour on commission and tips)
- Rev. Rul. 87-41 (Classification: W-2 or booth renter)
- Lab. Code 2775 and 2778 (Classification: W-2 or booth renter)
- IRC 7503 (The us calendar: tip reporting, payroll, license renewals)
- board renewal pages (The us calendar: tip reporting, payroll, license renewals)
- Custom Communications v. FTC (8th Cir. July 8, 2025); 91 FR 6507, section I.A, vacatur and restoration of the prior rule (Pitfalls that embarrass the product)
- Ryan LLC v. FTC (N.D. Tex. Aug 20, 2024); FTC September 5, 2025 release, dismissal of both appeals and acceptance of vacatur (Pitfalls that embarrass the product)
- Health and Safety Code 108980 (Pitfalls that embarrass the product)
- FDA updates of December 19, 2024; February 21, March 10 and April 28, 2025 (Pitfalls that embarrass the product)