You may be in the business of art and style, but when’s the last time your finances got a makeover? With the 2015 tax deadline looming, NAILPRO set out in search of the best ways to maximize your returns and avoid the dreaded IRS audit. We talked to seasoned salon pros and tax specialists about smart strategies for categorizing receipts, classifying businesses, making deductions and more. Read on for an easier, breezier tax season!
1. Find a Trusted Accountant
Marita Durham, who’s owned In the Nails Day Spa in Huntsville, Alabama, for 26 years and counting, says that if you’re a salon owner or independently contracted nail tech, your relationship with your accountant is as important as the one you have with your doctor. “It’s the person managing your money and interfacing with the federal government,” she explains. “If you have any kind of volume at all, find a good accountant, meet regularly and don’t be afraid to ask questions about deductions, forms and tax law—even if they sound silly in your head. That’s what CPAs are there for!” So, what do you look for in a tax pro? Jaime Schrabeck, who has owned Precision Nails in Carmel, California, for more than 20 years, recommends finding one who’s fiscally conservative. While some accountants may promise huge returns, be wary if it sounds too good to be true. “Check to make sure his or her clients don’t get audited on a regular basis,” she says.
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Once you’ve found a good match, Andrew Poulos from Poulos Accounting and Consulting in Tucker, Georgia, advises consulting with your tax professional regularly—or at the very least, midway and three quarters of the way through the year. “That way,” he says, “you can plan for taxes, review how your business is doing and be aware of opportunities to capitalize on.” An accountant can make sure that you’re taking advantage of all applicable tax credits, says Mark Luscombe, principal tax analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois. “For example, there’s the Work Opportunity Tax Credit, which grants breaks to those employers who hire disadvantaged workers, such as those on welfare or veterans,” he says.
Durham adds that having an accountant also makes it easier to get your taxes done quickly and correctly. “Don’t wait until four months into the year,” she advises. “Get your stuff together as quickly as you can, because the sooner you know how you did, the sooner you can analyze your profits and losses and figure out what is and isn’t working—and the better off you are.”
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2. Organize Your Receipts Throughout the Year
Yvette Best, CEO of Best Services Unlimited in Fayetteville, Georgia, advises many of her professional nail clients to keep three plastic boxes for receipts—in the salon, in the car and at home. “Anytime you get a receipt, write down what it’s for on the back and drop it into the box,” she says. “You can always reconcile the receipts into a filing system based on expense categories later.” Durham keeps file folders for that express purpose next to her work and home desks and also in the car, reasoning, “I’m usually out and about when I purchase something, which is why I keep a credit card expressly for business expenses. That way, if I do lose the receipt, then I can easily track the purchase on my statement.” Schrabeck relies on Quicken software to track her finances. “I recommend designating at least one weekly half-hour session to go through your receipts and update your reports,” she says.
When it comes to organizing your purchases for tax purposes, Luscombe recommends categorizing your receipts based on deductions. “Create electronic or physical folders and differentiate them by capital equipment purchases, materials and supplies, payroll-related expenses, utility expenses and, if you own, building expenses and depreciation.” If you’re filing your receipts physically, Poulos notes that you don’t want them to fade over time. “Buy an affordable scanner and cut out some time on Sunday afternoons to scan all of your receipts and save them electronically, being sure to back them up on the cloud, too,” he says. Lastly, don’t forget to take account of your check register and credit card statements, says Lisa Greene-Lewis, a Ladera Ranch, California-based CPA. “Never ignore extra deductions,” she says. “Tossing out $100 worth of deductible receipts is like throwing $30 in the trash. Be sure to include your end-of-year credit card purchases with your 2015 records. Even if you didn’t pay until the following year, they are deductible from when you charged them.”
3. Enforce Tip-Reporting
The IRS is on increasingly high alert when it comes to beauty industry tip income. The prevalence of salon software services like Square and Quicken is making it easier to keep tabs on credit card tips, but if you still deal in a lot of cash, Poulos recommends having all hires sign a contract stipulating the necessity of reporting all tips. “Put it in writing,” he says. “That way, if the IRS does try to audit you, you’ll have proof that employees are at least aware that they need to report tips. It doesn’t grant you immunity, but you’ll have some legs to stand on.” Schrabeck’s contract informs employees that they could be fired for not reporting (although thankfully, she’s never had to do that). It simply reinforces how important it is for both the nail pros themselves
and the salon to report tips. “Find salon software that accounts for tips in every client transaction,” she advises. “Pay out those tips every day and then report them as a cash advance for payroll purposes.”
Cash is typically king, specifically when it comes to tipping, but you might want to consider eliminating it altogether if you’re struggling to keep track of it all. Best says the salons she works with are increasingly phasing out cash altogether from their operations. “A lot are just taking PayPal, credit cards and checks, safeguarding themselves completely,” she says.
4. Make Tax Payments in Installments
Unlike W-2 employees (i.e. those workers on payroll), business owners don’t have taxes withheld from their income. So to avoid penalties, salon owners and 1099 employees (or booth renters) are required to pay estimated taxes throughout the year.
Best suggests making payments monthly. “Think of it like your personal bills that you pay every month,” she says. Anyone who expects tax liability—including W-2 employees—should be making estimated payments at least quarterly. “Depending on whether owners are sole proprietors or limited liability corporations, they’ll need to make payments according to their specific tax category,” Poulos explains. “You can be penalized for not making estimated payments if and when you’re supposed to.”
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5. Stay Up On Tax Law And Know What It Means For Your Deductions
You don’t have to scour endless legal documents, but it’s wise to stay aware of the current federal expensing limit, which tends to change from year to year. “It’s based on the Small Business Expensing Election, Code Section 179,” Luscombe says. “For instance, in 2015 it stipulated a $25,000 deduction limit—meaning you could only deduct $25,000 worth of new equipment and software that was purchased, financed and put into service by the end of 2015. Business owners now need to take stock of all 2016’s spending caps and deduction limits, and plan their annual spending accordingly.”
Poulos says that your best bet is to talk to your accountant about whether or not it’s a good year to buy new chairs or TVs, or to renovate. “If you do renovations in December of a year with a generous spending cap,” he says, “it’s a good idea to write it all off right away. That way, the value won’t depreciate due to future years’ unpredictable spending and deduction limits.”
Additionally, salons employing more than 25 staffers must now pay heed to the Affordable Care Act, which mandates that employers provide health care coverage. “There are specific new filing requirements when it comes to reporting the care you’re giving your employees,” says Luscombe. “For 2015, you could be subject to penalties for failing to provide coverage or a cash amount that’s not necessarily tied to the purchase of health care.” Adds Greene-Lewis, “If you’re self-employed and paying for your own health insurance, know that it’s fully deductible on your tax return, as is your dependents’ insurance coverage.”
Finally, stay abreast of the IRS’ business standard mileage rates, which change from year to year. To that end, Best reminds salon owners and independent contractors to always track their mileage. “Ensure that you’re deducting all travel related to your business,” she says. “You can maximize your mileage by taking business-related trips—say, to pick up salon supplies—to and from your place of business. And if you’re seeing clients at home, make sure that the location is exclusively used for that purpose, and then you can take a deduction for the space, as well as for any furniture, supplies, computers and equipment you use.”
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6. Treat Booth Renters Like Independent Contractors
Nail techs who are W-2 employees can’t deduct nearly as much as salon owners. “People try to get creative with deductions, but that only gets them into trouble,” Poulos cautions. “Nail techs can only expense equipment and tools if they’re buying their own. The owner is charged with keeping track of all overhead expenses, as well as rent, supplies, upgrades and renovations.”
When it comes those nail techs who rent space to work in your salon, however, it’s important not to intervene too much—buying their products, controlling their schedules, etc. Otherwise, the IRS could come in and determine that such workers should be classified and treated as W-2, rather than 1099, employees. “There are about 20 categories the IRS looks at to determine the nature of the employment agreement, but financial control is the biggest consideration,” Luscombe says. “Do your independent contractors earn money from other sources? Do they have customers separate from your business, or is your salon their only source of revenue? If so, you may want to look into reclassifying them as W-2 employees.”
Durham, who works with several independent contractors, provides “basics” including paper materials, lighting and phone service. “Just make sure that you build all of that into the rent charged and that you’re covering your expenses,” she says. “At the end of the year, if you look at your P&L statements and find that you’re losing, you need to figure out where that loss is coming from.”
If you are the booth renter, Best recommends creating an S corporation for yourself, rather than remaining a single-member LLC. “Many independent contractors don’t want to bother because it involves a lot of paperwork, but it’s always better to be a corporation—you can cut many of your taxes in half and you’re allowed more deductions,” she says. “Plus, corporations are audited less frequently.”
No matter your classification, role in the salon or tax bracket, our experts are in unanimous agreement about the most important thing you can do for yourself and your finances: maintain good record-keeping! If your records were less then stellar in 2015, now’s the time to find a system that works for you, and resolve to stick to it throughout 2016 and beyond.
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