Tax Filing Tips for Hair Salons, Barbers, and Hairdressers
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.
Key Takeaways
- If you’re a self-employed salon owner or independent contractor, you probably should make estimated tax payments using Form 1040-ES to cover your income and self-employment taxes.
- Hair salons and barbershops have a long list of deductions that they may qualify for to help lower their federal income tax burden.
- You can typically deduct the cost of a necessary piece of equipment instead of depreciating it if it costs $2,500 or less.
- If you're taking professional training to further your career as a stylist or barber, you may be able to qualify for the Lifetime Learning Credit, which can be up to $2,000 per tax return to cover qualifying tuition and related expenses.
Figure Out Your Employment Status Early
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?
Self-employed vs. independent contractor vs. employee
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.
- Independent contractors: Generally, if you completed a Form W-9 and received a Form 1099-NEC during 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 typically considered an employee.
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.
Common hair salon tax deductions
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.
TurboTax Tip:
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.
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.
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.
To understand more about tax deductions, visit our Self-Employed Tax Deduction Calculator for Contractors.
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 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.
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 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 is gradually phasing in new 1099-K reporting requirements for payments from third-party processors like Venmo and Paypal. In 2021, Congress changed the reporting threshold from over $20,000 in payments and more than 200 transactions to over $600 in payments regardless of the number of transactions. But instead of using the new $600 threshold right away, the IRS applied the previous reporting threshold for the 2022 and 2023 tax years. For the 2024 tax year, the IRS plans to use a $5,000 threshold, regardless of the number of transactions. The tax agency hasn’t announced its plans for after 2024 yet. On the other hand, some states have already started using the $600 threshold for their own reporting requirements.
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