Independent hairstylists have the freedom to run a successful business, but they need to be aware of self-employed hairdressers' tax obligations, bookkeeping, and other legal details.
You may be wondering how hair salon taxes work if you own or operate a barbershop or hair salon - or if you cut and color your own hair as an independent contractor. What business deductions and credits can you claim?
In this article, you will find important tax tips that can help you to file a return and receive your maximum refund.
How to File Taxes as a Professional Hair Stylist
Taxes are filed by professional hairstylists and barbers in two ways.
If the stylist is employed by a hair studio that pays hourly wages, then the company withholds taxes from the pay. When a stylist rents a booth at a hair salon or is self-employed, they file taxes differently.
In the case of withholding taxes from wages, the employee files taxes based on the income shown on their W-2 form. Individuals who are self-employed, however, must submit tax documentation as business owners. When business owners prepare their taxes there is a different tax process to follow.
Self-employed vs. independent contractor vs. employee
Owning a salon or barbershop makes you self-employed. For stylists and barbers working in these businesses, it's less clear-cut. There are a few simple ways to determine whether or not you are an employee.
- Independent Contractor: You are generally considered an independent contractor if you completed a Form W-9 and received a Form 1099-NEC during tax season.
- Employee: If you completed Form W-4 and received Form W-2 during tax season, you are considered an employee.
Federal income tax should be withheld from employees' paychecks. However, self-employed business owners and independent contractors must save up and pay their own federal income taxes and self-employment taxes. In most cases, self-employed individuals and independent contractors are required to make quarterly estimated tax payments to the IRS using Form 1040-ES.
How much tax does a self-employed hairstylist pay?
If you are an independent beauty professional, you pay income tax and self-employment tax. Schedule SE can be used to estimate the amount of self-employment tax you owe, Form 1040 Schedule C to report your income and losses, and Form 1049-ES to pay the estimated tax.
The self-employment tax is 15.3 percent of your net income (what remains after subtracting business expenses) - 12.4 percent of your Social Security tax and 2.9 percent of your Medicare tax. According to the IRS, beginning in 2021, the Social Security tax will apply to income up to $142,800. If you're filing taxes for 2020, the 12.4% will only apply to the first $137,700 you earn. An additional Medicare tax of 0.9 percent may apply if your net income exceeds a certain threshold, such as $200,000 for a single individual.
There are seven tax brackets for income tax, ranging from 10 to 37 percent. You pay taxes based on your filing status (single or married filing jointly, for example) and taxable income. An individual with $40k in taxable income falls into the 12 percent tax bracket, which means he pays 10 percent on the first $9,875 earned during the year and 12 percent on the rest.
Tax Process for Self-Employed Hair Stylists
Tax form 1040 can be used by self-employed stylists to complete their taxes. In addition, Schedule C must be completed in order to determine whether income earned during the year was a profit or loss. In order to figure out the amount of self-employment taxes due, Schedule SE is completed.
If the stylist has made quarterly tax payments, these amounts are deducted from the required tax amount for the entire year. Professional stylists who have not submitted an early tax anticipation payment must send the full amount of self-employment taxes.
A Form 1040 is used to list all deductions, including those for dependents. Self-employment taxes may be covered by the refund if the stylist qualifies for earned income credit. Stylers under 25 years of age may qualify for a lower self-employment tax rate and the earned income credit.
While preparing for federal income taxes, business expenses can be deducted. Stylers can include these expenses on their tax return as a total amount on form 1040. It is beneficial for the stylist to keep these records in case of an audit, even though the IRS does not require receipts for these expenses.
A stylist must also file a state tax return based on local income tax laws. Self-employed stylists must also pay tax on their income based on state laws and tables. Additionally, you may deduct the costs of operating the booth or business when filing your tax return.
Reporting Income and Earnings
Make sure you keep detailed records of your earnings and expenses, including cash and credit card payments, tips, transaction fees, and more. Consider hiring an accounting professional such as a CPA, or using accounting software.
As an independent hairstylist, you must pay both self-employment tax and income tax. U.S. citizens who are self-employed and have net earnings of $400 or more are required to file Form 1040 with the IRS. If you make less than $400 but meet the other requirements listed on the 1040 form, you must still report your earnings.
In addition to the fees and tips you receive from your clients, everything you earn from your job goes into the income-reporting section of Schedule C. Sales of beauty products, for example, are included in this section as well.
Owners of salons may send you a 1099-MISC showing your yearly earnings if you rent space. It's important to keep your own records, since not every salon does this. Cash payments are particularly challenging, as you don't have checks or credit-card receipts to remind you. If you're audited, good records will convince the IRS that you're not hiding anything.
Don't Forget to Report Tip Income
Employees are supposed to report their tip income to their employers so that they can include it in their tax returns. When you report all of your tips, they will already be reflected on your Form W-2, which you submit with your tax return.
Occasionally, tips go unreported. If you did not report your tip income to your employer, you will need to fill out Form 4137. Unreported tips are included in your income, and unpaid Social Security and Medicare taxes are calculated.
Self-employed salon owners should include any tips they personally receive in the income they report on their tax returns.
You may receive a 1099-K if you receive payments through online payment services, such as PayPal. These forms will also be sent to the IRS to report your income.
Helpful Resource: Taxes on Tips: Guide
What can a hairdresser claim for tax write-offs?
It is a common misconception that every expense can be claimed as a tax deduction. However, this is not the case. Tax write-offs for hairstylists need to be either actual business expenses or directly related to helping their business grow.
You may be limited in how much you can claim, even when something is tax-deductible. For example, deductions for items such as automobile mileage, business-related entertainment, charitable donations, and retirement plans are limited.
Common Tax Deductions for Self Employed Hairstylists
If you're interested in maximizing your tax deductions (and you should be! ), the next question is: what can a hairdresser claim?
Here are some options:
Tools and Supplies
Tools and supplies are among the easiest and most common tax deductions for self-employed hair stylists. The items can range from scissors, shampoo, blow dryers, sinks, mirrors, and styling chairs.
Be sure to keep your receipts in case you are audited.
You can deduct a hairstylist license fee if your state or local jurisdiction requires it.
Staying on top of trends and improving your skills is always beneficial to your business. Additionally, relevant courses and trade magazines can be deducted as business expenses by the IRS.
Generally speaking, many things related to your office can be deducted from your tax return, including rent if you lease a commercial space or a chair in a salon, utility bills, basic equipment, and upgrades.
How to File Your Hairstylist Taxes
Professional tax preparers ask you simple questions and help you complete all the necessary forms. These services are ideal for independent contractors and small businesses.
These tax experts will look for the right deductions to help you maximize your tax savings and help you locate deductions that are specific to your industry. In addition, they will organize your records in case of an IRS audit, while answering specific questions about your tax situation.
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