Have you seen the new IRS regulations? If not, and your salon is using Venmo or a similar app for tips, then it’s time you read the below – it explains the recent changes and answers all of your questions.
WHAT ARE THE NEW REPORTING REQUIREMENTS?
Effective January, 2022, the IRS is requiring Venmo and other payment apps to report a user’s tips (and other business transactions) to the IRS if they exceed $600 for the year. More simply put, anyone who receives at least $600 in tips through Venmo can now expect to receive a 1099-K.
WHAT’S A FORM 1099-K?
Form 1099-K is a tax form used by payment companies like Venmo, PayPal, and Stripe to report payments for goods and services. These organizations that facilitate payments are required by law to file them with the IRS and provide copies to the payment recipient.
You’ve always been liable for the taxes on tips – and that remains. What has changed is the threshold for Venmo and others to report these tips to the IRS. Until this year, the “reporting threshold” was much higher – they weren’t required to file a 1099-K until the recipient reached over $20,000 AND over 200 transactions. But effective this year the threshold has been lowered to only $600 and no minimum number of transactions. A big change, and an important once to pay attention to.
AS A SALON OWNER, WHAT’S MY LIABILITY?
If you are a W-2 salon, you are liable for all FICA and payroll taxes on all tips, regardless of how they were paid.
WHAT IF MY STAFF DOESN’T REPORT ALL THEIR TIPS THEY RECEIVED ON THEIR VENMO OR OTHER PAYMENTS’ APPS TO ME?
If you are audited, the IRS may ask to review your employees’ Venmo and other payment app accounts. If they find a discrepancy in reporting, you (the owner) will be liable for all back FICA/ payroll taxes and related penalties. Not to mention the position it places your employees in for payment of their back taxes and penalties.
ARE THERE BETTER ALTERNATIVES?
Of course. Let’s do a quick analysis of the reasons behind the use of Venmo in salons to better understand the owners’ pain points. These reasons will then dictate the requirements for the new, alternative solution.
THE ORIGINS OF USING VENMO FOR TIPS IN SALONS/SPAS:
Several factors have driven salons and spas to post their employees Venmo “handles” at the front desk, all of which are explained below:
- Processing Fees: On average, owners pay 3% to process a tip. This is money out of their pockets since they still give the whole tip to their employee. This equates to an average $2500 in extra expenses annually for the salon owner. Remember the old days when salons posted signs at the front desk saying, “No tips on credit cards…please use the ATM.” Venmo has become the modern version, saying “No tips on credit cards…please use Venmo.” It’s an age-old problem with a new solution.
- Disbursement Times: These days everything is instant. And it’s the same with tips – your staff does not want to wait to receive their tips a week or two later through payroll. They want their tips instantly. Venmo funds are received in a couple of days, and if the users desire, they can pay a fee for instant.
- Less Cash: Salon owners don’t want the hassles of cash anymore. It’s expensive and ripe for fraud. And with COVID, there are safety concerns. In summary, customers aren’t carrying cash and owners don’t want to handle cash anymore.
One solution to all these problems is Tippy, an innovative product developed by a chain of east coast salons. Its success lies in the fact it was designed and built by actual salon owners. Everyone on Tippy’s sales and support teams have worked “behind-the-chair” at some point in their careers! And as a confirmation of Tippy’s success, it can already be found in all 50 states- from individual salons/spas to nationwide chains.
Below is a brief chart comparing Tippy with payment apps like Venmo. Note the first and most important feature related to this article. And remember – the owner pays NO PROCESSING FEES with Tippy, and the employees pay no fees to receive their funds instantly. And all done without handling cash.
One final and very important note. Now that everyone is going to be paying taxes on their tips received through payments – credit cards, debit cards or payments’ apps like Venmo …. there’s another important requirement for salon owners and their employees to consider. They should choose a solution that “OPTIMIZES” tips. It is well known that a customer will tip more if “they know you know” what they tipped. When customers used to hand cash to their stylist, they knew you knew.
So they tipped higher. It’s human nature. But when they are writing a tip on a credit card receipt at the front desk, they tip lower because they don’t know you will know. Again…it’s human nature.
Tippy takes this point seriously and has designed a system to ensure the customer “knows you know.” Tippy’s software notifies the stylist’s mobile phone immediately with the name of the tipper and the tip amount. And its customer facing tip screens provide a personalized user experience that results in tips going up an average of 22.3%. It’s a winning solution for all.