Salon Tips and Taxes in the US: No Tax on Tips, W-2s and the FICA Credit

For many stylists, barbers and nail techs, tips are a big part of take-home pay, and since 2025 they come with new federal rules: a deduction your team claims, new boxes on the W-2 you issue, and a payroll tax credit your salon can now claim. This guide covers what changed, what you have to do as the owner, and where the old rules still apply.

Federal rules as of November 3, 2026. States differ, and a state named here is an example, not a full list. This isn't tax or legal advice: confirm your own situation with a tax professional.

#What changed for salon tips in 2025 and 2026?

Three things: a federal income tax deduction for tipped workers, the extension of the FICA tip credit to salons, and new tip boxes on Form W-2. All three come from the 2025 tax law, H.R. 1 (the One Big Beautiful Bill Act), which became Public Law 119-21 on July 4, 2025.

#How does the "no tax on tips" deduction work?

It lets an eligible worker deduct up to $25,000 of qualified tips a year on their federal income tax return, for 2025 through 2028. The deduction phases out once modified adjusted gross income passes $150,000, or $300,000 on a joint return. It's claimed on Schedule 1-A, so workers get it whether or not they itemize.

To claim it, the worker needs a Social Security number valid for employment, and married workers must file jointly. The tips must appear on a Form W-2, a Form 1099 or another statement furnished to them, or be reported by the worker on Form 4137.

What counts as a qualified tip

The IRS describes qualified tips as voluntary cash or charged tips received from customers or through tip sharing. Under the final regulations:

• Cash, check, credit card, debit card and gift card tips can all qualify.
• Tips received through a tip pool can qualify.
• The customer must pay voluntarily, and the amount can't be negotiated.
• A mandatory service charge isn't a qualified tip; a charge the customer can decline or change may be.
• The tips must be received in an occupation on Treasury's list.

Which salon roles are on the list

The final list groups more than 70 occupations into eight categories, each occupation with a three-digit Treasury Tipped Occupation Code (TTOC). The personal appearance and wellness group covers most salon and spa roles.

Only tips received in an occupation that customarily and regularly received tips on or before December 31, 2024, are qualified. If a role in your salon isn't on the list, its tips don't qualify, and you'll show that with code 000 on the W-2.

What it doesn't do

It's an income tax deduction, not a payroll tax exemption. IRS Publication 15 says tips are still generally subject to both the employer and employee shares of Social Security and Medicare tax when they total $20 or more in a month. You keep withholding and paying on reported tips exactly as before. Whether your state's income tax follows the federal deduction depends on the state.

Two more limits: a self-employed worker can't deduct more than their net income from the business, and tips earned in a "specified service trade or business" under section 199A don't qualify. If you're unsure whether that label fits your business, ask your tax professional.

#What do you have to report for 2025 and 2026?

Nothing new was required for 2025. For 2026, the Form W-2 has two new entries for tips.

Tax year 2025: transition relief

The IRS left the 2025 Forms W-2 and 1099 unchanged. Under Notice 2025-62, employers face no penalty for leaving off a separate total of cash tips or the worker's occupation code for 2025, as long as the forms are otherwise complete and correct. The IRS encouraged employers to give workers those figures anyway, for example through an online portal or a separate written statement, so they could claim the deduction. Workers got their own 2025 guidance in Notice 2025-69.

Tax year 2026: box 12 code TP and box 14b

The 2026 W-2 instructions add two entries:

• Box 12, code TP: the total cash tips the employee reported to you.
• Box 14b: up to two Treasury Tipped Occupation Codes for the occupations the tips were received in. If any tips were received in an occupation that isn't on the list, one of the codes must be 000.

Mandatory service charges aren't tips: Publication 15 treats them as wages, so they stay out of code TP. If an employee gives you an updated Form W-4 to reflect the deduction, you must use it, with the withholding procedures in Publication 15-T, so the benefit shows up in each paycheck.

#How must employees report tips to the salon?

In writing, by the 10th of the following month, whenever their tips from your salon total $20 or more in a month. If the 10th falls on a weekend or legal holiday, the report is due the next business day. Employees report cash, check, debit card and credit card tips, including what they keep from a tip pool. Non-cash tips, such as tickets, aren't reported to you.

There's no special form anymore. Publication 531 says Forms 4070 and 4070A are now historical, and Publication 1244, which carried them, was made obsolete in 2024. Unless you set your own method, the employee gives you a signed and dated statement with their name, address and Social Security number, your name and address, the period covered and the total tips. You can also let staff report electronically. If you're setting up payroll for the first time, how to open a salon in the US covers registrations and first hires.

What you do with the reports

Withhold federal income tax and the employee's Social Security and Medicare on reported tips, from their wages or from money they give you, and pay the employer's share. If there isn't enough by the 10th of the month after the report, Publication 15 sets the order: regular wages first, then Social Security and Medicare on tips, then income tax on tips. Social Security and Medicare you couldn't collect go in box 12 of the W-2 with codes A and B.

An employee who doesn't report tips to you can owe a penalty of 50% of the Social Security and Medicare tax on them, Publication 531 says. Tips they didn't report to you go on their own return, with Form 4137 for the Social Security and Medicare.

#Can your salon claim the FICA tip credit?

Yes, for tax years beginning after 2024. The 2025 law extended the section 45B credit, which had covered only food and beverage businesses, to employers whose staff receive tips for providing barbering and hair care, nail care, esthetics, or body and spa treatments, where tipping for those services is customary. You claim it on Form 8846.

The credit equals the employer Social Security and Medicare you paid on those tips, except on any tips needed to bring an employee's pay up to the federal minimum wage of $7.25 an hour. If you pay a tipped employee at least $7.25 an hour in wages excluding tips, every reported tip counts. If you pay less, as under a tip credit, the tips that make up the difference each month don't.

It's a non-refundable general business credit: the IRS says unused amounts carry back one year or forward up to 20. Form 8846 tells you to reduce your income tax deduction for employer Social Security and Medicare by the credit. Service charges and automatic gratuities don't count.

#Tip credits, tip pools and the minimum wage

Federal law lets you count some tips toward the minimum wage, but never lets you keep them. Your state may be stricter, and you must follow both.

• Tipped employee: one who customarily and regularly receives more than $30 a month in tips.
• Tip credit: you may pay a cash wage of at least $2.13 an hour and count up to $5.12 an hour of tips toward the $7.25 federal minimum. First you must tell the employee the cash wage, the tip credit amount, that the credit can't exceed their actual tips, and that tips are theirs except under a valid tip pool. Without that notice, there's no tip credit.
• Shortfalls: if wages plus tips fall short of the minimum wage in a workweek, you make up the difference.
• No keeping tips: the FLSA prohibits employers from keeping any part of employees' tips for any purpose, whether or not they take a tip credit. Managers and supervisors can't share in them either, except tips they receive directly from customers for service they directly and solely provide.
• Card fees: federally, you may deduct the card processing fee on a tip, but no more than the actual fee, and not so that pay drops below the minimum wage.
• Tip pools: with a tip credit, only employees who customarily and regularly receive tips can be in the pool. Without one, non-tipped staff can be included (the DOL's examples are cooks and dishwashers; in a salon, think of the front desk), but never managers or supervisors.

Without a tip credit, tips don't count toward the minimum wage at all, so a commission-paid stylist must reach it from commission and wages. Setting commission that holds up in slow weeks is covered in salon commission structures.

Salos also records stylist tips in its rewards and wallet module (full on Pro and Ultra, limited on Core). It doesn't calculate payroll taxes or produce Forms W-2, so tip reporting still runs through your payroll provider.

States set their own rules

Alaska, Minnesota, Nevada and Oregon also require the full state minimum before tips, and Montana does for businesses with gross annual sales over $110,000. Some states change their rates during the year, and cities and counties can set higher minimums, so check your state labor department's current rate. California also bars employers from deducting card processing fees from tips and requires card tips to be paid by the next regular payday.

#How do tips work for booth renters?

A genuine booth renter is self-employed, so none of the employer rules above apply. Their tips are part of their own business income: they don't report them to you, and you don't withhold. They can claim the no-tax-on-tips deduction if their occupation is on the list, limited to their net income from the business.

If a renter's clients tip through your card terminal, that money is the renter's, so pay it over as your rental agreement says. And if you set a "renter's" prices, book their clients and take their money, the IRS may see an employee. Booth rental vs commission explains the tests, and more guides for salon owners are in Fully Booked's international edition.