Why do nail techs only take cash?

“A lot of techs prefer cash tips because they think there's no record of receiving them, and therefore they won't have to pay any taxes on them or declare them as earnings,” says Elizabeth Morris, owner of The Nail Hub in Scottsdale, Arizona.

nailpro.com - Pro Advice on the Tipping Process - Nailpro

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Accepting tips for a job well done is a practice most nail techs take for granted these days. “It’s part of our culture in America to want to reward excellent service, whether it’s having a beauty service done or going out for a nice meal,” says Carla Hatler, owner of Austin, Texas-based Lacquer, who reports that her salon’s techs consistently receive 18% tips on average. It might seem like a straightforward practice, but whether you’re a salon owner or a nail tech, there’s a lot to keep in mind to ensure the tipping process runs smoothly—and is compliant with legal requirements. Here’s what you need to know.

Reporting Tips Is the Law

First and foremost, while it may be tempting to pocket tips, you’re required to report them to the IRS—or risk paying a penalty. “The IRS considers tips income—that’s all that should matter,” says Jaime Schrabeck, Ph.D., owner of Precision Nails in Carmel, California. Indeed, individuals must report all tips received totaling $20 or more for any month (while working for one employer) to their employer so that income, Social Security and Medicare taxes can be withheld. If you don’t report your tips to your employer, you must calculate and pay Social Security and Medicare taxes on your tips when you file your tax return. (See IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, located at irs.gov/forms-pubs/about-publication-1244, for more information.) Bear in mind, the IRS doesn’t differentiate between cash and credit card tips. “A lot of techs prefer cash tips because they think there’s no record of receiving them, and therefore they won’t have to pay any taxes on them or declare them as earnings,” says Elizabeth Morris, owner of The Nail Hub in Scottsdale, Arizona. “This is a dangerous road to take. As a service provider, if you [appear to] make $0 in tips in a high-tip industry like beauty services, it’s a huge red flag for the IRS.” The fines for noncompliance are steep: If you’re audited, you could be required to pay a penalty of 50% of the Social Security and Medicare taxes due on the unreported tips. Besides avoiding a costly IRS audit, however, there are other benefits to reporting tips. “Compliance always lends credibility to your business,” says Schrabeck, “and increasing your contribution to Social Security boosts future retirement income.” In addition to Social Security payments, reported earnings are used to calculate disability and unemployment benefits. “If you’re underreporting your true earnings, then those benefits are also going to be undercalculated,” says Hatler. And as Hatler sees it, you never know when you’ll need to tap into those benefits. “When we were forced to close because of COVID, it was very beneficial to our staff to not only be properly classified as employees and not independent contractors but also to have all of those wages reported, because everyone had an unemployment check in their hands at the same time that they would have received their next paycheck,” she explains.

Consider the Pros and Cons: Cash Versus Credit Cards

Both cash and credit card gratuities are subject to reporting requirements, but some salons accept only cash tips—and many techs prefer it. On the surface, the advantages of cash tips are compelling. From an employee perspective, techs gain instant access to cash tips rather than having to wait for their paychecks. From an employer viewpoint, credit card gratuities are more expensive than cash tips. “There are 2-3% fees on credit card transactions, so there’s an expense to employers to accept credit card gratuities for their employees, and that money doesn’t benefit the salon in any way,” says Hatler. Still, there are plenty of pros to accepting credit card gratuities. Reason number one: compliance. “It insures all wages are recorded and proper taxes are taken out,” says Hatler. Second, it’s more convenient for many clients to pay by credit card, which means it’s easier for them to tip appropriately for services, stresses Morris. “Not many people carry cash anymore, so if you only accept cash tips, you may wind up with whatever they’ve got left in their wallets, which means they aren’t tipping you as a percentage of the total service,” she says. “Those who integrate tipping into credit card transactions, however, usually get 18-20% gratuity.”

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Avoid Common Tipping Pitfalls

Whether you decide to accept tips in cash, by credit card or both, reporting and payroll can be complicated and tedious, but point-of-sale systems can make the process a lot easier. “We record cash tips in our point-of-sale system so we aren’t relying on the staff to report the tips, and credit card transactions are reported as well,” says Hatler. “We also use it to run payroll, so there are no errors.” The process now runs seamlessly at Lacquer, but it didn’t always go so smoothly, Hatler recalls. When Lacquer first opened, the salon would pay techs their credit card tips in cash at the end of every week to provide them with timely access to funds while reporting the amount on their paychecks. “Every time payroll came around, they were always shocked at how low their checks were, because no one was keeping track of how much cash they were bringing home on a weekly basis,” she says. “We quickly learned a lesson that we needed to hold the credit card tips and pay them with their checks instead, which helped the staff better track and manage their money.” Another pitfall can occur when tips need to be divvyed up between multiple nail techs. Putting a procedure in place can help owners avoid disagreements between staff members. “Our system works incredibly well,” says Schrabeck. “If a client tips after having received simultaneous services performed by two different nail professionals, we split the tip according to the percentage of the service cost generated by each pro, unless otherwise instructed.”

Make It Easy for Clients to Tip You

Most clients are accustomed to leaving a tip when they’re happy with a service, but nail pros can facilitate the process by observing a few best practices. Keep in mind, however, that a subtle suggestion is more likely to elicit a generous gratuity than a blunt request, advises Morris. “Don’t make it awkward by talking about it,” she says. Instead, Morris suggests displaying envelopes for gratuities at the checkout counter and making sure transaction receipts include a “tip line.” Better yet, use a point-of-sale system or app that can be customized to suggest gratuity percentages so clients don’t have to spend time calculating the tip. “I cannot emphasize enough how much your tips rely on the tipping process being simple for clients,” says Morris. “Providing a one-click button for tipping is way better than leaving it up to the client to choose how much they want to give.” In the end, it’s important to remember that you can’t control how much—or even if—your client will choose to leave a gratuity, reminds Hatler. “We should always give the same level of service to every client, regardless of whether they will tip,” she says.

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Mind Your Money Matters

When it comes to budgeting, Morris advises against counting on tip income to pay bills. “Tips are gravy and should be treated as such,” she says. “A lot of nail techs make the mistake of keeping their service prices low to avoid scaring away potential clients or losing current ones, and then they just hope and pray they’ll make up for it with tips. Although tips are part of the way you earn money, they shouldn’t be relied upon to cover your expenses or pay yourself. It’s better to set your service prices at what you need for your business, and let tips be icing on the cake for when you really wowed someone.” The same advice holds true for business owners: If you provide services, there’s no reason not to accept tips, says Hatler—just make sure you aren’t relying on them to keep your business running. “If your business is structured properly so that you’re factoring in all of your expenses and leaving enough to make a profit, then you shouldn’t need to rely on tips.” One way to resist spending tip income, recommends Morris, is to deposit it directly into a business account, because you may owe tax on the money later anyway. “If you pocket your tips every time, you’re that much more likely to spend the money at HomeGoods than save it for a rainy day or reinvest it in your business,” she says. Lotus Abrams is a freelance writer and former NAILPRO editor based in the San Francisco Bay Area. Due to the COVID-19 pandemic, many salons have struggled financially. To provide assistance, a new bill, H.R. 821, seeks to temporarily extend the 45B FICA Tax Tip Credit and apply the credit retroactively, enabling salon owners to access the tax funds they paid over the past four years. “Existing tax relief extended to the professional beauty industry can provide a lifeline for many owners struggling to stay open under limited capacity with restrictions on services stylists can provide to clients due to PPE requirements,” says Myra Irizarry Reddy, government affairs director at the Professional Beauty Association (PBA). “Our tax system can be used to help salons hold onto their establishments and continue to employ beauty professionals.” To find out more information about the bill and get involved, visit probeauty.org/advocacy/fica.

nailpro.com - Pro Advice on the Tipping Process - Nailpro

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