Tips are taxable wages. Whether paid in cash or added to a credit card payment, tips count as income for your employees and must be included in payroll. Many salon and spa owners overlook this requirement, leading to compliance issues at tax time or during audits.

Credit card tips are the easy part. When a client adds a tip to their card payment, the amount runs through your POS system and creates a clear record. Most modern salon booking and payment systems track these automatically. You just need to make sure this data flows into your payroll calculations each pay period.

Cash tips require more effort because there’s no automatic paper trail. The IRS requires employees to report cash tips to their employer if they receive more than $20 in a calendar month. In practice, this means keeping a daily tip log. Employees record each cash tip as they receive it, then report the monthly total to you by a set date before you run payroll.

Create a simple tip tracking form or use one provided by your scheduling software. Some salons use a notebook at the front desk. Others have employees submit weekly reports through an app. Whatever method you choose, be consistent and keep records. For small business bookkeeping on Long Island, getting these details right from the start prevents headaches later. You’re required to withhold income tax, Social Security, and Medicare taxes on reported tips just like regular wages.

The tips get added to employee wages when you run payroll. Most payroll systems have a dedicated field for reported tips that calculates the proper withholdings. If your current system doesn’t support tip entry or you’re doing this manually, errors pile up fast. Getting your payroll system configured properly means tips flow through correctly each pay period without extra work.

Keep tip records for at least four years. This includes the reports employees submit, amounts included in payroll, and taxes withheld. If you’re audited, you’ll need documentation showing you properly tracked and reported tip income.

One common question: what about booth renters? If stylists rent space from you and operate as independent contractors, their tips are their own business. You don’t track or report them. Tips only become your concern when the person receiving them is your W-2 employee.

Accurate tip tracking keeps you compliant, ensures employees pay the right taxes, and makes tax time straightforward. If your current setup feels disorganized or you’re not confident you’re handling tips correctly, it’s worth getting the system right now rather than cleaning up problems later.