. . . unless they want to pay more in taxes!

For decades, salons and barbershops have relied on a contractor model. Hairdressers and barbers typically rent a chair, handle their own bookkeeping, and report income as sole proprietors. This structure gave workers independence and allowed owners to avoid payroll costs.

However, recent changes in tax law have shifted the balance. For many shops, the old model is no longer the most tax-efficient. By transitioning stylists into employee status, both workers and owners can take advantage of powerful new tax benefits that are unavailable to contractors.

The New “No Tax on Tips” Deduction

The One Big Beautiful Bill introduced a groundbreaking provision: eligible taxpayers can deduct up to $25,000 of tips received, provided they fall under an income threshold.

Here is the catch:

• Tips must be reported on a W-2 or a 1099.
• Contractors who pocket cash tips as sole proprietors cannot deduct them.
• Employees, however, can report tips through their employer and fully benefit from this deduction.

In practice, this means stylists who remain contractors may leave thousands of dollars of potential tax savings on the table. Employees gain a direct advantage by simply being able to structure their tips within the tax system.

Expanded FICA Tip Tax Credit

The FICA Tip Tax Credit, which historically applied to restaurants, has been expanded to cover barbers and hair stylists.

Here is why this matters:

• Employers are normally responsible for paying half of Social Security and Medicare taxers on employee wages, including tips.
• Under the new rules, businesses can claim a dollar-for-dollar tax credit for the FICA taxes they pay on employee tips.

In other words, the government is effectively reimbursing shop owners for their share of payroll taxes on tips. Contractors cannot trigger this credit.

What’s in It For Employees?

For stylists, the shift to employee status is a tradeoff. On the downside, contractors can currently deduct expenses for supplies, travel, and tools. Employees lose those deductions unless they are reimbursed by their employer.

The upside is far greater:

• Employees only pay half of FICA taxes (their employer covers the other half.)
• Their employer then receives a credit for the taxes they did pay, reducing overall tax costs.
• Employees gain access to benefits such as unemployment insurance, workers’ compensation, and possibly health benefits, depending on the employer.

The key adjustment is that stylists will need to negotiate with shop owners to cover the cost of supplies or shift that responsibility to the business.

The Employer-Employee Model is the Clear Winner

From a tax perspective, both sides benefit when stylists are classified as employees:

• Employees: Can deduct tips, pay lower FICA, and potentially gain access to benefits.
• Employers: Receive a full refund of their FICA liability on tips, while strengthening retention and compliance.

The old contractor model was built for a different tax environment. Today, it leaves money on the table for both workers and businesses.

The bottom line: If you run a salon or work in one, the least amount of tax will be paid when hairdressers are W-2 employees. This may require renegotiating contracts and restructuring operations, but the financial rewards are too significant to ignore.