Veronica Tubman: Well, I see it's the top of the hour, so let's get started. Welcome to today's webinar Tip Information for the Cosmetology Industry. We are so glad you're joining us today. My name is Veronica Tubman, and I am a Senior Stakeholder Liaison with the Internal Revenue Service and I have the pleasure of being your moderator for today's webinar. Before we begin, if there is anyone in the audience that is with the media, please send an email message to the address listed right on the bottom of this screen. Be sure to include your contact information and the news publication that you are with. We really appreciate that. As a reminder, this webinar will be recorded and posted to the IRS Video Portal in a few weeks. The portal is located at www.irsvideos.gov. Technology problem, so in case you do experience a technology issue, this slide shows helpful tips and reminders, we've posted a technical help document that you can download from the materials button and that's right on the left side of your screen. And it provides the minimum system requirements for viewing this webinar, along with some best practices and quick solution. If you have completed and passed your system check and you are still having problems, just try one of the following. The first option is close the screen where you're viewing the webinar and simply re-launch it. And the second option is to click on settings, and that's right on your browser's viewing screen and select HLS. You should have received today's PowerPoint in a reminder email, but if not, no worries, we've got you covered. You can download it by clicking on the materials drop down arrow on the left side of your screen, as shown on this slide. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers as well, please click the closed captioning drop down arrow and that's located on the left side of your screen. This feature will be available throughout the webinar for your convenience. We will also have a question-and-answer session, at the end of today's webinar. Our speaker will answer as many questions as time allows. If you have a topic specific question today, please submit it by clicking on the Ask Question, and that's right on the drop down arrow to reveal the textbox. Type your question in the textbox and then just simply click send. Very important, just remember, please, please do not include any taxpayer specific or sensitive information. Again, I would like to say welcome and thank you so much for joining today's webinar. But before we move along with our session, let's just make sure that you are in the right place. Today's webinar is Tip Information for the Cosmetology Industry. The webinar is scheduled for approximately 75 minutes. Today's webinar is packed with tip information that is specific to those who work in the cosmetology industry. With that being said, let me introduce today's speakers who are going to share that information with you. Tammy Wise is a Senior Program Analyst in the National Tip Reporting Compliance and Sharon Huff is the West Territory Tip Coordinator. During today's webinar, they will provide you with information that is applicable to salon owners, cosmetology employees, booth renters and cosmetology school students. I'm going to turn it over to Tammy to begin the presentation. Tammy, it's all yours.

Tammy Wise: Thanks, Veronica and welcome, everybody. On behalf of Sharon and myself, I would like to thank you for joining us today. If you have questions after the webinar, we've included the email address where you can send your questions. Additionally, there is a resource slide of publications that you can refer to after today's webinar. Cosmetology covers so many different occupations such as but not limited to hairstylist, colorist, nail technician, nail artist, manicurist, salon or spa manager, massage therapist, beautician, wedding and event stylists, makeup artists, esthetician, barber, shampoo person and this is just a few. So as we go through this presentation today, all of our examples of scenarios could relate to any of these positions. Sharon, can you go over the agenda for today's webinar? Sharon Huff: Of course, it is my pleasure. There are so many items that we could cover today during our webinar, all relating to tip income. But with our limit to time, we have selected topics that based on our discussions with industry are some of the most misunderstood. We will be providing you with useful information, as well as exposing and debunking myths about tips received and the requirements to report them. Here is what we will cover. What is considered tip income in the cosmetology industry? We will discuss exactly what tips are. What are the responsibilities of employees, salon owners, cosmetology school students and independent contractors relating to tip income.

You will learn that each of the categories just mentioned have similar but different requirements under Internal Revenue Code. What are tip excuse me, what are the reporting and record keeping requirements of tip, reporting tips through point of sale system used in the cosmetology as well as app for keeping track of tips received. Tammy, back to you. Tammy Wise: Thanks, Sharon. Internal Revenue Code Section 61 is the starting point for our discussion. The section clearly states that gross income needs all income from whatever source derived. So simply stated, tips are considered income and therefore they are taxable. It is the law. Tips received are required to be reported on your federal income tax return and are subject to income tax. If you are an employee, tips are defined as wages under the Internal Revenue Code and therefore they are subject to Social Security and Medicare taxes. If you are not an employee, tips are gross receipts or other income subject to income tax, and they could be subject to self-employment tax.

So now let's get into the details for a better understanding. Tip reporting on your federal income tax return helps with personal financial growth. Tip reporting is important because we've all applied for loans or government benefits and what is the first thing they want to say, oh, your tax return. That's because the amount you're eligible to receive is based on your reported income. So increased tip reporting can have other benefits. Not related to the IRS, increased tip reporting increases overall income and can affect an increased state benefits, like your unemployment or disability or workers benefits like workers compensation or federal benefits like social security at retirement, and reporting can also make it possible to save more through a retirement account like a 401k. Improved financial reporting can also help with purchasing a home or a car as well. You can achieve a better credit rating and a lender can make increased limits and better terms making it possible to buy a bigger or nicer home car or both. So, what is a tip? To be a tip Revenue Ruling 2012-18 cites four factors from Revenue Ruling 59-252. The payment must be free from compulsion. So basically, the customer decides the amount and is not bound by policy established by the salon. Such as it is not mandated like an automatic 20% added to the bill or 18% added, the customer makes that decision. The customer must have the unrestricted right to determine the amount of the payment. Sometimes they decide that the tip is a percentage based on what the amount of the bill was, or sometimes it's just a flat amount, or sometimes, and this really relates to me, they round it up so that the bill ends up to be a round amount, okay, because I like to put it in my checkbook as, I want that amount to be a round amount; I want it to be 120, I don't want it $119 and so much cents. But the payment cannot be negotiated or dictated by employer policy. And the customer has the right to determine who receives the payment. So when a customer pays for their service, and then provides you with additional money, it is considered a tip. It is done without negotiation, as I said from the salon or the stylist and usually it's in the form of cash, or a credit or debit card. Tips can be received from customers or sometimes from other employees. For example, if there is an employee who washes the client's hair, it may be customary to tip out to that employee. So in that situation, the stylist will report their tips, less the amount provided to the shampoo person and the shampoo person will receive the tip out, who receives the tip out, excuse me, will need to report that amount received as a tip, if after the services performed the client states, here's a little gift for you and provides you some money. You might ask, is that a gift? Well, no, the answer is no, it is a tip. The client cannot determine the characteristic of the money received. It's the facts and the circumstances determine what the money is and how it is to be treated. So, next we're going to discuss tip reporting requirements. So, first on the list is service charges. Sharon, would you mind covering service charges please? Sharon Huff: I sure will Tammy. If the salon applies a service charge that is not considered tip income because as Tammy has explained, the client did not have free will in deciding that amount. That amount is called a service charge and is not a tip but can be a wage. For instance, if the salon charges 18% on the bill for a bridal party, the 18% is collected by the salon and it can be distributed to employees. If distributed to employees, the amount is part of their wages, not tip. The employer will add these amounts to your wage statement and Form W-2. Veronica, do you have a polling question? Veronica Tubman: Well, yes, I do, Sharon. Okay, everyone, let's take a look at our first polling question. A salon adds a 20% fee for all bridal parties. The bridal party was the only salon activity for that day and comprises 100% of the gross receipts for the day. The salon had no other customer activity. The amount is, is it a, tip; b, a gift; c, a bonus; d, a service charge. So please take a minute and review the question again then click in the radio button that you believe most closely answers the question. And I'll give you a few more seconds to make your decision. So, let's see, look at it again and think about it. Which one is it? Okay, we're going to stop the polling now. And we'll share the correct answer on the next slide. And the next answer is D, a service chart. So, let's take a look and see what our response rate is. Okay, well, that's a great response rate, 90%, you were listening. Good job. Okay, so just remember that a service charge, as the customer does not have free will in determining that amount. Good job. Sharon, I'm turning it back over to you so that you can continue to share about tip responsibilities.

Sharon Huff: Thanks, Veronica. There are similar, but slightly different rules and regulations, depending on if you are an employee, salon owner, booth renter or even a cosmetology school doing it. For Internal Revenue Code, Section 6053(a) paraphrase, every employee, who in the course of their employment, by an employer, receives in any calendar month tip, which would be cash, credit cards, debit cards, and even gift cards of $20 or more shall report all such tips in a written statement furnish to their employer on or before the 10th day following such month.

Gift cards are considered a cash equivalent, since they have a monetary value. So, for example, for the month of January, the employee must report their tip of $20 or more by the 10th day of February. An employer may request the employees report their tips more frequently, such as daily or weekly. Employees must keep a contemporaneous and accurate record of tips received so that they can report those tips to their employer, as I just said, by the 10th day of the following month, and an employer may require the employee to report more frequently. An employee's daily tip log must have the following information, the employee's name, address and their social security number, their employers name and address, the period or date covered, so if it is or less than a month, the box should have the date covered. So if you're reporting for a two week period, you would list the two week period; otherwise, you would list it for the month. The IRS has Publication 1244, Daily Record of Tips and Report to Employer to help employees with their reporting tips. And I just realized I skipped, let me go back to the prior slide and I do apologize. So, again, we're talking about the employee tip log and also included are the dates worked with tips received from customers and other employees; credit, debit and gift cards received; tips paid out, Tammy gave an example of a stylist that may share their tips with a shampoo person and the employee name who you paid the tip to, the date furnished to your employer and the total amount received; do not include any service charges. Alright, I apologize for my little snafu. I'm going to go ahead now and start talking about the IRS Publication 1244.

IRS has Publication 1244, Employees Daily Record of Tip and Report to Employer, to help employees with tip reporting. The publication includes Form 4070 and 4070A; one is to report to the employer and the other is the employee tip log. These are available free of charge. Ordering information will be provided later in this presentation. Here on the screen is our Form 4070A.

The form has boxes for all the required items. You must include general information such as the name and address, an employer's name, and the month in the year or a shorter period payroll, a payroll may be a two-week period or weekly that the tips are received. The log must include date worked; tips received from customers and other employees; credit, debit, gift card tips received; and tips paid out with the name of the employee who was paid. Daily record keeping is extremely important and is required under law. These forms are developed to insist to assist the employee with their record keeping. This can be used as a template to create your own tip log. Some employees will use a calendar, diary or other similar recordation items to manually capture their tip. And that is okay, so long as it includes all of the information shown on the screen. There are even various apps available. We're only going to name a few such as TipSee, Tip Counter, TipMe, and Tip Report. As I said, these are just a few. Each of these apps can be downloaded right to your phone and will help employees keep track of tip on a daily weekly and monthly basis. It is very important to note that no matter what method is used, the employee must include all required items. The emphasis is on the detailed daily record keeping as tip in a manner that is complete. It must also be accurate to the IRS if you're - excuse me; it also must be accessible to the IRS if you're asked to provide proof of your tip income. If employee fails to report all tips to their employer as required by law, there is another method to report and pay. The employee can report additional tip on Form 4137 Social Security and Medicare Tax On Unreported Tip Income. This form is attached to the federal to the employees federal income tax return. Form 4137 will calculate the employee's share of Social Security and Medicare tax and this will be added to the amount due on the employee's federal income tax return. Form 4070, that's also part of the Publication 1244. This form is completed by the employee who receives the tip and given to their employer and is retained by the employer.

Publication 1244 contains 14 copies of the Form 4070. So that's enough for one per month, plus two extra. If you're reporting tips, biweekly and using the Publication 1244, you would need to order another copy of the 1244. This form was created for your use and convenience. As you can see, the form has all required items on the left side, your name and address, your employer's name and address, the month or payroll period you received tips over $20 and your signature. On the right side are boxes for your social security number, your cash tips received; credit, debit, gift received; and the amount of tips paid out, if there are any. I have highlighted boxes three and four with the arrows that you see on the screen. Box three is to separately state the tip out and box four adds all the tips together received in cash or credit card and then subtracts the amount paid out to arrive at net tip. The net tips are the taxable amount to the employer excuse me, to the employee. And finally, a box for the date signed and submitted to the employer. Veronica, why don't we pause here for our second polling question? Veronica Tubman: Why, thank you, Sharon. Well, audience it's time for our second polling question. So put your thinking caps on. A contemporaneously kept tip diary needs to include is it a, cash tips only; b, credit or debit card tips only; c, all tips less documented tip out; or d, 100% of all tips received. Please take a minute. Remember what Sharon just shared with us. Review the question again then click in the radio button that you believe most closely answers the question. And I'll give you a few more seconds to make your selection. So, just remember a contemporaneously kept tip diary needs to include? Is it a, cash tips only; b, credit, debit card tips only; c, all tips less documented tip out; or d, 100% of all tips received. Okay, we're going to stop the polling now and will share the correct answer on the next slide. And the correct answer, drum roll is c, all tips less documented tip out. So let's take a look and see how everybody did. Oh, no, our response rate was only 32%. So I'm going to call on Sharon to give us some clarity regarding this polling question to help everybody out. Sharon, can you help us out? Sharon Huff: I certainly will. So as we've been talking about all tips do need to be reported and perhaps we had some of our participants, Mark column excuse me, item d, 100% of the tips received. The reason why that is not correct is we do not want the employee to pay taxes on tips that they shared with others. So if the employee, let's say, tipped out 10% to excuse me, $10 to shampoo person, and they had received $100 in tip, we would ask that the employee report 100 minus $10, which would be 90, and then the shampoo person would report 10, then the total would be 100. But the reason why c is correct, it's all tips, less documented tip out. The IRS wants to have 100% of all tips received but in this case, it would be reported by two people, the stylist and the shampoo person. I hope that provides some clarification for our participants. Veronica Tubman: Okay. Thank you, Sharon. We appreciate that clarity and that help with that question. That really helps us out. So, hey, Tammy, tell us more about salon owner tip obligations, please.

Tammy Wise: Thank you, Veronica. I will. So while the employees are required to report their tips to their employer by the 10th day of the month, following the month that they received the tip, well, the salon owners have some responsibility. The owners are required to withhold the employee's share of the Social Security and Medicare taxes, which is currently at a rate of 7.65%. So the employees , they have to pay their share of the Social Security and Medicare taxes. And then the employer also has to pay their share of the Social Security and Medicare taxes, which that was also at 7.65% of the tips reported, so both the employee and the employer are going to pay their share of the Social Security and Medicare taxes. And then to accurately pay that amount, it is imperative that the salon owner has a process and excuse me procedure in place for employees to report their tips. And the process and procedure must clearly be clearly communicated to all employees to avoid the administrative errors. If a payroll service is being used, it's also important that the salon owner let that payroll service know that your business receives tips so that when they set up your profile, they know that tips will be reported by the employees. So this is really important because they need to know that tips are going to be reported so that they are reported on the owners quarterly federal employment tax Forms 941 and the employees Form W-2. Then tips can be paid out to employees either daily or included in their paychecks. So, one reason that the employer may want to include the tips in the paycheck of their employees is to ensure that there is enough income to cover the Social Security and Medicare taxes on tips the employees earn. Because remember I said that they have to withhold the employees share at 7.65% of the tips reported. So there's got to be enough money there to pay or to withhold Social Security and Medicare. So paying tips over time and each pay period, it's going to help reduce the amount due by the employee on tax day, and it's just good on tax planning. So, Veronica, let's take our third polling question now. Veronica Tubman: Okay, audience, let's see who was listening to Tammy. And now it's time for our third polling question. And it reads, if an employee reported $200 in tips for the last pay period, how much would the employer withhold for the employees share of FICA tax? Is it a, $7.65; b, $15.30; d, I'm sorry, c, $19.13; or d, $20.75. So please take a minute, review the question again, think about what Tammy just shared with us and then click in the radio button, you believe most closely answers this question. And I'll give you a few seconds to make your decision. So just take a few more seconds to think about those things that she shared with us. And click the radio button that you believe most closely answers this question. Okay, we're going to stop the polling now and we'll share the correct answer on the next screen. And the answer is b, $15.30. So let's see how everybody did on that one. Okay, the response rate was 78%. So guess what? We're going to ask Tammy to give us a little bit more clarity on this question, on our third polling question.

Tammy, can you help us out with this? Tammy Wise: I sure can. So I think this one just might have been just a little bit confusing and I did stress the 7.65, so I think that those that got it wrong might have guessed a, but it was just a math question. So since they reported $200, we're going to take $200 times 7.65% and that comes out to $15.30. So the employer would withhold $15.30 on $200 of tips that were reported during that week, by the employee on those tips. So you can see it is only $15.30 but if you've kind of figured that out over the course of a year that all of this money would be unreported, if it wasn't being taken out by the pay period, either weekly or biweekly, and you had to pay it at the end of the year, you're going to get a large tax bill. So I hope that helps all of our audience, Veronica. Veronica Tubman: Okay, Tammy. We sincerely appreciate you with that. It's always good when you have some subject matter experts around to provide some clarity to our polling questions. It really helps. Good resource. Okay, Tammy, let's keep this going with salon owner tip obligation. Tammy Wise: Okay, I sure will. I'm sure we have some salon owners out there and they operate in states where they are allowed to pay a tip wage. Well, studies in the industry have shown that the vast majority of employers were out of compliance with their legal obligation to ensure that workers reached their full minimum wage when their tips are less than the tip credit. So in these states, here's what happens, if the federal minimum wage is $7.25 and the salon owner pays the tipped employees $2.13 per hour, the employee needs $5.12 worth of tips to make up the minimum wage provision. Well, if the tips are less than $5.12 per hour then the salon owner must pay the difference by increasing the wage rate and this is mandatory. Okay. The studies are showing that owners are out of compliance on this area. Okay, there are some salons that even operate under a no tipping policy and they don't even apply a service charge. Well, if this is the salons policy, the IRS would want to see that this message was clearly communicated to clients. And additionally there should be some sort of a written notification provided to the employees with consequences for accepting tips. We have been told that salon owners may not allow tips but instead suggests that their clients purchase retail products. It's certainly an owner's prerogative, but if there is no signage, it would be difficult to support the no tipping policy, especially if the IRS questions you.

Signage and supporting policies demonstrate the owners intent of not allowing tips to be given to their employees. So, now we're going to move on to booth renters and their tipping obligations. Sharon? Sharon Huff: Thanks, Tammy. Booth renters are also known as independent contractors, they are not employees. A booth renter rents space in the salon and operates their business as separate and distinct from the salon owner. The booth renter is responsible for keeping record of all income earned and received. As previously discussed, per Internal Revenue Code Section 61, income includes income earned from the services performed, income and/or commissions earned on products sold and tips received from customers. For a booth renter, since they are not an employee, they report tips they received on their federal income tax return as another source of income. For example, a sole proprietor would file Form 1040 US individual income tax return with a Schedule C, which is the form to report profit or loss from a business that a sole proprietorship used to report business income and expenses and then they're going to file Schedule SE, which is a self-employment tax so that they can pay self-employment tax, if applicable. Or income may be reported on Form 1065, which is a US return of partnership income, or even Form 1120 which is our US corporate income tax return. Remember, under IRC 61, all income received is taxable. It's time for our fourth and final polling question. Veronica, let me turn it over to you please. Veronica Tubman: Okay, thanks a lot, Sharon. So, let's think about the really good information that Sharon and Tammy has shared with us, as we are going to go ahead up and talk about our fourth polling question. An independent contractor or a booth renter received a total of $125 from their clients. The cost of the service itself was $100. The client purchase $10 of product. How much income would the independent contractor report on their federal income tax return? Is it a, $125; b, $115; c, $100; or d, $110? So, please take a minute and review the question again and think about what Sharon and Tammy shared, then click in the radio button that you believe most closely answers the question. And I'll give you a few more seconds to make your selections. So just let me read that one more time. An independent contractor or booth renter received a total of $125 from their client. The cost of the service itself was just $100. The client purchased $10 of product, how much income would the independent contractor report on their federal income tax return is it a, $125; b, $115; c, $100; or d, $110? Hopefully that gave you enough time to look at that question, review it, roll that information that we just shared with you around and click the radio button that you believe most closely answers that question.

Okay. We're going to stop the polling now and we'll share the correct answer on the next slide.

And the correct answer is a, $125. So, that was the independent contractors' booth rent received a total of 125 from their client, the cost of the service itself was 100, the client purchased $10 of products and the question was, how much income would the independent contractor report on their federal income tax return? And that was $125. So let's just take a look at how the audience did. Okay. I see that our response rate is not really good, it's only 74%. So we're going to ask Sharon, to give us some clarity and help us out with this question so that our audience will be on track. Sharon? Sharon Huff: Yes, Veronica. So, as Veronica shared with you and I mentioned previously, the amount is $125 because a salon owner, independent contractor, the total amount they received is 125 and that was comprised of $100 for the service $10 from products, and now we're up to 110. And then $15, which you have to read into here is the tip. So the three components, $100, $10 of product, and $15 of tip compromised the full amount of $125. So, that is the correct answer, $125. Veronica Tubman: Okay, thank you so much. We appreciate you. And that gave us some clarity on that question. It was a little tricky, but we thank you for that. And we know that our audience took notes on that one. So Sharon, looks like you're going to cosmetology school students tip obligations next, I think. Sharon Huff: Yes, and I will be happy to cover that. Students at cosmetology or even the barber school, they have to spend a certain required amount of time on the floor, performing hair and beauty services for the customers of the school.

This is a statutory required part of their training. They are performing services as students in training. They are not independent contractors because they are not in business for themselves.

They are students and their services are part of their licensing requirements. They are provided with a place, often referred to as a clinic to train and are told by the school what to do and when to do it. I remember when my sister was in cosmetology school, her instructor would have to come at certain points to check her work and make sure that what she had done on me, her sister, was accurate. Since students are not yet licensed, they cannot perform these services outside of the school's watchful eyes. Cosmetology and barber students tip from performing services while in school are income subject to income tax but they are not subject to Social Security and Medicare tax or self-employment. Cosmetology and barber students tip from performing the services while in school should be reported as other income per Internal Revenue Code Section 61A on the front of the student's income tax return. Tammy, would you like to start as we could Tammy, would you like to help cover some of our few commonly asked questions. Tammy Wise: I sure would, Sharon. Well first we have Sally and she owns Best Cuts Ever Salon and she works as a stylist. And she has some loyal customers who have been with her for more than two decades. Oh, I can relate to that because I've been with my hairstylist for more than two decades. And many of her customers feel like old friends during their time in the chair getting a haircut, they often talk about their personal, the tips they give feel more like a thank you and not a tip. Well, Sharon, what do you think? Are these really tips? Sharon Huff: Yeah. As the owner of the salon, the tip is reported as business income amounts received from all customers, regardless of the years of relationship are income and must be reported on the federal income tax return. Tammy, do we have another example? Tammy Wise: Yes, we do Sharon. Vivian works at Best Cut Ever Salon as a stylist. She uses her tip money to pay for decorations for her booth, fuel for her car. Sometimes she picks up groceries on our way home and since her tips are used for necessary items, are they really income? Sharon, what do you think? Sharon Huff: Yes, Tammy. The amounts received from all customers are income and must be reported on the federal income tax return. Now, if Vivian is a booth runner, the amount is reported out as the business income. If Vivian is an employee that amount is reported to her employer as tip by the 10th day of the following month. The employer will add that amount to Vivian's W2. Tammy, can you let us know about resources that are available to the industry? Tammy Wise: I can do that. Well, IRS has several publications that provide excellent information on tip income, reporting the tips, recording tips, and guidance for employers or employees. These products can be downloaded from IRS website at www.irs.gov or ordered by calling 800-829-3676. All of these publications are available free of charge. And you may want to consider ordering for your employees, so first up, we have Publication 531 Reporting Tip Income. This publication gives you a good summary of keeping a tip diary, reporting tips to your employer and reporting tips on your tax return. This publication is available in English, Braille and large print. Sharon talked a lot about Publication 1244 and that publication includes the Form 4070A, Employees Daily Record of Tips, which you can use as a template to prepare your own tip diary if you don't want to use the booklet, but remember, you must include all of the elements. And this publication also includes Form 4070, Employees' Report of Tips to Employer. You can use this form or your employer might have some other method for reporting tips, such as their point-of-sale system or their time clock. This publication is available in English, Braille, large print, and Spanish. Next we have Publication 3148, Tip on Tips, a guide to tip income reporting for employees who receive tip income. Well, just as the title states this publication is for employees and explains the employees reporting requirements. The Publication 3148 is available in English and Spanish.

Employers, I don't want you to feel left out, we have Publication 3144 Tips on Tips, a Guide to Tip Income Reporting for Employers and businesses where tip income is customary. Well, just as the title reflects, this publication is going to give you information about requirements. This publication is available in English, Braille, and large print. Now, finally, this is the one that you're going to be most interested in it is Publication 4902 Tax Tips for the Cosmetology and Barber Industry. The purpose of this publication is to educate the workforce of the cosmetology and barber industries on federal filing, reporting and payment obligations. This publication is available in English, Spanish and Vietnamese. And this publication talks about shop owners who is an employee, shop owners and employer tax responsibilities, booth renters tip income responsibilities for the employer or booth renter, and the employee tip reporting responsibilities. That's just about everything we covered in this webinar. The IRS also has recorded tip webinars that provide additional information. You can view these webinars at www.irsvideos.gov. Remember, you can download these publications from the IRS website at www.irs.gov or order by calling 800-829-3676. The IRS has a program dedicated to tips, National Tip Reporting Compliance and Sharon and I are both a part of this program and we're two of the subject matter experts. We have a quite a few more and we answer questions relating to tip income. So if you have a question or a request, please submit it to our email box at Tip.Program@irs.gov. If necessary, you may even request some of the publications from us and we can usually send those publications out within a few days. Sharon and I would like to thank you for taking your time and attending this webinar. Veronica, so that's all we have for right now, so I'm going to turn this back over to you. Veronica Tubman: Okay. Thanks, Sharon and Tammy. Okay, audience, hello, again.

It's me, Veronica Kaufman Veronica Tubman and I'll be moderating the question-and-answer session of this webinar. Before we start the question-and-answer session, I want to add my thanks to everyone for attending today's presentation, tip information for the cosmetology industry. You took time out of your schedule to join us and we just want to let you know how much we appreciate it. Earlier I mentioned we want to know what questions you have for our presenters.

So here's your opportunity. If you haven't input your questions, then you still have time. Go ahead and click on the drop down arrow next to ask question, type your question in the field and click send. I see some of you have. Tammy and Sharon our subject matter experts, they're going to hang around and they are going to help us answer these questions that you've given us. One thing before we start, we may not have time to answer all the questions submitted. However, let me assure you, we will answer as many questions as time allows. So let's get started so we can get as many questions answered as possible. So let's take a look at our questions. Tammy and Sharon, you ready? Okay, ladies. Our first question says my client gives me a $25 Starbucks card. Is this a tip? What do you think Sharon? Sharon Huff: Yes, that actually is a tip. If you recall earlier in the presentation, I mentioned that tip, that money received also includes gift cards.

Gift cards are what we call cash equivalent. You can quickly turn those into cash, so that would be reported to your employer as a tip. Veronica, anymore? Veronica Tubman: Sure. We have lots more ladies, so I'm about to toss the ball to Tammy. Okay, I work as a shampoo person and sometimes customers give me money and the hairstylist pays me a certain amount per shampoo. Am I only required to report the money the hairstylist provides to me? Tammy Wise: Well, I can definitely help here Veronica. So, no, the shampooer is required to report both the money that the customer gives and what the stylist gives. So first of all, remember what is a tip, that's money that a customer gives freely, and they determined who they give it to. So the customer is tipping the shampoo person. And then the stylist is tipping out. So, both monies are tips and Internal Revenue Code of 61 says, all money must be reported. So the shampoo person is going to report both of those amounts to the employer as their tip income. So, Veronica, are there more questions out there? Veronica Tubman: Oh, yes, Tammy. Our audience has given us some really good questions, so here we go. What is the difference between cosmetology tips and waitressing tips?

Is there a difference? I'm going to toss that to you Sharon. Sharon Huff: I'm happy to discuss this. So the definition of a tip is not industry specific. So if you are a cosmetologist, a masseuse, a waiter, waitress, if you're a taxi cab driver, it all reverts back to Internal Revenue Code Section 61, which says that all income is taxable. So this tip would be taxable, regardless of whether you're a cosmetologist or working in the food and beverage industry or even if you're working in a casino, perhaps you're a slot attendant or a card dealer, the tips are taxable, doesn't matter the industry that you work to. Veronica Tubman: Okay. Alright, ladies I am reviewing the question. Sharon Huff: Veronica? Veronica Tubman: Yep. Thank you, my dear.

Reviewing these questions, they are so good. I'm so excited with the interaction from our audience and I appreciate it. So here's another question, is a tanning salon part of that industry? And that was a question that came up. Is tanning salon a part of the industry? Tammy Wise: I'll go ahead and take that for you, absolutely. A tipping industry, just kind of like what Sharon just hit on, I mean it can be anything. So any industry where tipping, it is customary, it is considered to be a tipping industry. So if tips are received, and it's more than $20 in a given month, they are required to report their tips to their employer and even if it's less than $20 in a month, they're still required to pay income tax on that amount and report it on their income tax return. So, yes, a tanning salon, that's part of the cosmetology industry, and they would need to report their tips. But even if it wasn't part of cosmetology, they still get tips and wouldn't be required to report that. Veronica Tubman: Okay, Tammy, so in the same respect with this question, I have another one for you. Will this practice also be applied to the dog and animal groomers? Is this the same thing? Tammy Wise: It is the same thing. It really doesn't matter if people that start getting tips I just can't believe how many places get tip income now and that's a very good question. Because I know when I take my dogs to get groomed, absolutely they expect tips and so they should be reporting their tip income, just as everybody else is that is earning tip report it. So it really doesn't make a difference who they are or what type of service they're providing. If they are earning tips, they should be reporting that income as required by the law. Veronica Tubman: Got it. Okay. We appreciate that. These are some really, really good questions. Okay. Let's see. I have something for Sharon. The salon I work at has a policy to assert an automatic tip of 18% for wedding party. Did I understand you to say this is not a tip? Sharon, did I understand that correctly? Sharon Huff: That, you did Veronica, because the salon automatically puts on this service charge also known as an auto gratuity and the customer did not have free will to either tip a higher amount or a lower amount that is considered a service charge, it is not reported as a tip. Your employer will take the service charge amount and report that, and it will be reported as an additional amount of wages. So, when you're completing your Form 4070 with the amount of tips that you've received, you're not going to include that amount because it is a service charge and not a tip. Veronica Tubman: Okay, got it. Okay, Sharon. Going to need you to we have a few questions on the sale of products, so see if you can help out with that. Just clarify the tip income received as a separate amount from business expenses, such as cost of goods are sold or other products? So how does that relate to the tax return, if you could help us out with that, Sharon? Sharon Huff: Alright, I'm going to make sure that I can understand that question. So, Veronica, I am going to paraphrase it and let's make sure that I'm on the same page. So I believe what I'm hearing is that I perhaps have just completed excuse me a customer, whether doing their hair or maybe masseuse, maybe makeup, and the customer purchased something from me. And let's say that the price of this item is $15. I believe what I'm hearing is, do I need to include that $15 in my income and then can I take an expense? Is that the question, Veronica? Veronica Tubman: There you go. You got it. Sharon Huff: Beautiful. I just wanted to be for clarity. So yeah, that's a product of $15 that you sold will be included in your gross income. And yeah, as a salon owner, or an independent contractor, you would take an expense in the expense portion, whether you've filed the Schedule C, which is your sole proprietorship, or you're filing a corporate return, your 1120, a partnership return 1065, there are spaces for you to be able to take that either as an expense of the supplies or as part of cost of goods sold out. So, very good question. You have the income at the top part of your return, and then you're going to take an expense against your income at the bottom section of the return. Veronica. Veronica Tubman: Yes. Alright. Sharon Huff: I think I answered you? Veronica Tubman: Yes, you did. Sharon Huff: Excellent. Veronica Tubman: Yes, you did. Thank you so much.

Okay. Let's stay back at you, Sharon. A client pays the salon for their services, and then sends a payment through Venmo or Zelle. Is that money considered a tip and if so, is it reportable?

Sharon Huff: I like these questions, because it shows that our audience is really attentive, and they would like to learn. We are moving more and more into electronics. We don't have very much money. A lot of people don't even carry money. And so if a customer pays the salon owner, the barber, the masseuse, and then sends additional money, which we're going to call a tip through an electronic device, Venmo, Zelle, there's one called Cash App, we have Apple Pay, Google Pay.

There are so many of these electronic payments, because the nature of the payment to the service provider was in conjunction with the service that was provided, that is still going to be a tip.

So if you remember when we talked about Internal Revenue Code Section 61, all tips are taxable, regardless of their form. So whether they were cash, credit, debit. Now, we should also include app, such as the Zelle and Venmo and gift cards that we talked about. Back to you, Veronica.

Veronica Tubman: Thank you. Okay, Tammy, thrown a ball at you. If I only receive $15 in tips during a month, am I required to report those tips to my employer and it's a two-part question? Tammy Wise: Okay, that's good to know it's two parts and they were listening, for sure. So, that's great that somebody caught on to that. So, because they only earn $15 in a month, the answer is no. That is not required to be reported to their employer. If they if any employee earns less than $20 in tip income, that's a total of less than $20 in a month, you're not required to report that amount to the employer. Veronica Tubman: Okay. So, what's the other part - Tammy Wise: Yeah, go ahead. Veronica Tubman: I think you got it, Tammy. I was so anxious, you got me going there. Am I required to report this amount on my tax return? I think you answered but can you restate it for me? Tammy Wise: Yes, absolutely. It does have to be reported on the tax return.

But there is a little silver lining in this. Okay, even though it has to be reported on the tax return, you're not going to have to pay the Social Security and Medicare taxes on it. So, there is a little silver lining, while you're going to have to pay me income taxes, just, you're not going to have to pay Social Security and Medicare taxes but just like we've been saying, because Section 61 does state that all income received is subject to federal income tax, so. I know Veronica, you said there's lots of questions. So I'm sure you've got another one or two out there for us. Veronica Tubman: Okay, I'm going to toss the ball at Sharon. Someone says they're independent contractor and their friend, it's always, when it comes from a friend, told them that they don't have to report any of their tip income. Sharon, what do you think about that? Sharon Huff: Well, I can attest that I've heard this question before, because my sister worked as a licensed cosmetologist for a while, and we would have the biggest fight. Well, so and so said, and so and so said, so let me set the record, straight. All income received is going to be taxable income. And we appreciate the opportunity to debunk myths that are out there and passed around from generations to generations, or for maybe someone who's newly started, they get some advice from someone who has been in the industry for a while, but that is considered a tip and would need to be properly reported. Veronica Tubman: Okay. Thank you much. Okay, ladies, I'm going to toss this up to both of you. In May someone quit working for an employer and didn't report the tip that they earned during May. That was prior to their resignation. How do they report that income? And should the income be reported as tip income to the new employer? Can you help us out with that? Tammy Wise: Veronica, I'll take that one for you. That is an awesome question. And again, they were listening, please don't report that to your new employer. The new employer should not be paying the Social Security and Medicare taxes on that income because you weren't their employee at the time it was earned. And we see this all the time, say, a person worked for somebody and during the month, they quit and they didn't report that tip income, and doesn't matter what occupation you're in. So what would happen is, you report that income on your tax return, just like we've talked about, and remember that Form 4137 we talked about earlier and that's used to calculate the Social Security and Medicare taxes, you're going to use that form, you're going to attach it to your federal income tax the Form 1040 and the two between the 1040 that calculates your income tax and the Form 4137 that calculates the Social Security, Medicare taxes, those two get added together, and then you will have your taxes. But never report income that you earned while working from one employer to a different employer, so just remember that. Okay, so please don't report it to your new employer. Veronica Tubman: Okay. All right. So Tammy, we have a frequent customer. He is a season ticket holder for professional football team. He was paying for his haircut and a shave, and he gave his tickets for the game to his barber because he wasn't able to attend the game. Is that considered to be taxable? Tammy Wise: Yes, it is. I know that's probably very disappointing. But it's just like the gift card, anything of value that's received as a tip then the value of that is taxable and it's considered a tip, and it needs to be reported. So if it's an employee, then he's going to report it to his employer by the 10th day. If he isn't an employee, then he's going to report as gross income, either on his Schedule C or on the 1065 partnership return or on the 1120. But yes, whatever the value of those tickets were will be the amount of the tip income. Veronica Tubman: Okay, thank you so much, ladies. Audience, unfortunately, these were great questions but that's all the time that we have. I want to thank Tammy and Sharon, to provide us with sharing their knowledge, their experience their expertise, for answering your question. Before we close the question-and-answer session, Tammy, what key points do you want the attendees to remember from today's webinar? Tammy Wise: Well, first and foremost, I want them to remember that tip are always taxable, regardless of your profession. So if you receive tips as an employee, you must report them as wages to your employer. If you're not an employee, tips are gross receipts or they are other income, which may be subject to self-employment tax, but they're always going to be subject to income tax. Tips received by students who are performing services at cosmetology schools as part of their training are not subject to Social Security and Medicare tax or even self-employment tax, but they are additional income. So still, some reminders for some employees, keep a log and it's required, and it has to be daily. And it's of all tip received, and tips paid out to other employees, each and every day. The Form 4070A that's used for your use or it's available for your use. And you can use it as an example if you want to make your own log.

Some of the key areas are cash tip, and then your credit and debit card tips, tips paid out to other employees and the names of those employees that you tipped out to. Submit the amount of tips you received, similar to the Form 4070, to the employer, no later than the 10th day of the following month or your employer could have some other methods in which you need to report the tip. And they might even ask for it more frequently. Employers, you need to remember to educate and monitor your employees on procedures. You might use the point-of-sale systems for reporting the tip or even the time clock, okay. Make it part of your on-boarding and hiring process and cover it when you have meetings with your employees. If you use a payroll service, make sure that they understand that your business receives tip income and let them know that so that they can set up your profile to show that tips are going to be reported by your employees. The information is needed so that they properly report tips on your quarterly federal employment tax Forms 940 and the employee's Form W-2s. Process reported tips through payroll and withhold the income, Social Security and Medicare taxes. Download and request Publication 1244, which includes the Form 4070 and Form 4070A to make available to your employees. You can go to www.irs.gov and search under forms and publication. And remember, we have that fantastic publication, Publication 4902, Tax Tips for the Cosmetology and Barber industry. It's going to be a valuable resource to both you and your employees. Veronica, I'm going to turn it back over to you. Veronica Tubman: Thank you, Tammy. Audience, we are planning additional webinars throughout the year. To register for all upcoming webinars, please visit IRS.gov, keyword search webinars. Just select Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will be offering certificates and CE that are credits for upcoming webinars. So that's something to think about. We invite you to visit our video portal at www.irsvideos.gov. There you can view archived versions of our webinars, including the ones on tip income, great resource for you to keep, really good information to have. Again, a big thank you to Tammy and Sharon for a great webinar and for answering your question. I also want to thank you, our attendees, for attending today's webinar on Tip Information for the Cosmetology Industry. We sincerely appreciate you. We would just like for you to take a few minutes to complete a short evaluation before you exit the webinar. If you'd like to have more sessions like this one, let us know. If you have thoughts on how we can make this better or if there's something more that you would like to share, then you let us know that as well. If you have requests for future webinar topics or pertinent information that you'd like to see, maybe in an IRS Fact Sheet, or Tax Tips or Frequently Asked Questions on IRS.gov, then please include your suggestions in the comments section of the survey.

Just go right ahead, click the survey button on the screen to begin. If it doesn't come up, check to make sure you disabled your pop-up blocker. It has indeed been a pleasure to be here with you. And on behalf of the Internal Revenue Service and our presenters, we would like to thank you for taking time out to attend today's webinar. It's really important for the IRS to stay connected with all taxpayers, individuals, tax professionals, industry associations, along with federal, state and local government organizations. You make our job a lot easier by sharing the information that allows for proper reporting. Thanks again for taking time out of your day to attend the webinar. We hope you find the information presented today helpful. You may exit the webinar at this time. Thanks again. Be well. Take care.