It’s coming up tax season and it is important to get prepared! Why is it so important to understand when and what to file when it comes to doing taxes as a business owner or self-employed hair stylist – especially when it may be tempting for some business owners to except cash and not declare all income.
As creatives and beauty professionals, managing our finances is just as crucial as mastering our technical skills! From navigating tax season to setting up a solid financial foundation, taking the right steps now can save time, money, and stress throughout the year…plus set yourself up for future success. Doing so will set you up for success when you’re looking to buy a home or take a business loan.
Your CPA can be a great asset to help navigate what’s best for you. Here’s are a few questions to ask them to help you make the most of their expertise, get organized, and prepare for a financially healthy 2025.
- What deductions can I claim as a salon professional? Supplies, equipment, social media content and advertising, attending education, even the occasional all black “uniform” maybe considered as write offs.
- Am I structured under the best business type? Ask if switching to an LLC or S-Corp could lower your tax liability. This is area is often surrounded by mystery and lack of clarity,
Here’s the 411 on each type:
Sole Proprietorship-The simplest business structure, where you and your business are considered the same legal entity.
Pros:
Ease of Setup: Minimal paperwork and no filing fees. You can start operating immediately.
Low Cost: No need for formal incorporation or ongoing compliance fees.
Complete Control: You make all the decisions without consulting shareholders or partners.
Cons:
Personal Liability: You’re personally responsible for all business debts and legal claims, putting your personal assets at risk. One very unhappy client can mean a lot of trouble here!
Tax Impact: All business income is taxed as personal income. This will result in higher taxes as you move into higher income brackets.
Who is Sole Proprietorship Best For?
While this is often sufficient if you have very low risk and minimal expenses, it leaves your personal assets vulnerable if you’re ever taken to court.
Limited Liability Company (LLC)
Often a business sweet spot, an LLC is a hybrid structure offering the simplicity of a sole proprietorship with the liability protection of a corporation.
Pros:
Liability Protection: Your personal assets are shielded from business debts and lawsuits.
Tax Flexibility: LLCs are taxed as “pass-through entities” like sole proprietorships, but… you can elect to be taxed as an S-Corp for potential tax savings.
Cons:
Setup and Maintenance Costs: There are filing fees and ongoing state fees to maintain your LLC.
Record-Keeping: You’ll need to keep your personal and business finances separate and follow certain compliance rules.
Self-Employment Taxes: By default, you’ll pay self-employment taxes on your entire income.
LLCS are Best For:
Salon professionals who want liability protection and plan to grow their business or take on more “risk”.
S-Corporation (S-Corp)
An S-Corp allows you to avoid some self-employment taxes while still benefiting from limited liability.
Pros:
Tax Savings: You pay yourself a “reasonable salary” as an employee and only pay payroll taxes on that portion. The remaining profits are distributed as dividends, which are not subject to self-employment tax.
Liability Protection: Like an LLC, your personal assets are protected.
3.Can I use retirement savings to offset my tax bill?
Retirement planning is not just about securing your future—it’s also an excellent way to reduce your taxable income. Here’s a breakdown of how you can save for your future and save on taxes.
1. Traditional IRA
This is a classic retirement account available to anyone with earned income and easily set up through a brokerage account with financial institutions like Vanguard or Fidelity.
Benefits:
- Tax Deduction: Contributions may be tax-deductible depending on your income level, let’s say you made a $100k and contributed $7,000 to your IRA..you would pay taxes on $93,000 and pay taxes on your retirement savings through when you start to use those funds in retirement.
- Flexible Contribution Limits: You can contribute up to $7,000 (or $8,000 if age 50+).
Best For:
Salon professionals just starting out with lower incomes or those who already maxed out contributions to other plans.
2. Roth IRA
A Roth IRA offers tax-free growth and withdrawals in retirement, making it a fan favorite tool for long-term savings.
Benefits:
- Tax-Free Withdrawals: Roth IRA contributions are made with after-tax dollars, which means you won’t pay taxes on withdrawals in retirement. Let’s go back to the $100,000 example, if you made a $100k and contributed $7,000 into you Roth IRA..you will pay taxes on the $100k, even though you don’t get a tax break now, those funds will grow without having to be taxed later.
- Flexible Contribution Rules: You can withdraw your contributions (but not earnings) at any time without penalty.
Considerations:
- Contributions are not tax-deductible.
- Income limits apply; if you’re filing as single and have earned more than $153,000 or $228,000 for married couples you will no longer be eligible for this account type.
3. SEP IRA (Simplified Employee Pension Individual Retirement Account)
A SEP IRA is a retirement savings plan with high contribution limits designed for high earning self-employed individuals and small business owners.
Benefits:
- High Contribution Limits: You can contribute up to 25% of your net earnings or $66,000 (whichever is lower).
- Tax Deduction: Contributions are tax-deductible, reducing your taxable income for the year.
Considerations:
- Contributions must come from the employer (you). If you have employees, you must contribute the same percentage of their salary as you do to your own.
- You can’t make employee contributions—only employer contributions are allowed.
What are some tips for keeping finances and documents organized throughout the year, to make tax season a little less daunting when it comes around.
Stay on Top of Your Expense Tracking, this helps ensure a smooth tax return and eliminates last minute chaos of trying to get everything together.
Here are a few tried and true tips:
- Use Accounting Software: Tools like QuickBooks, Wave, or FreshBooks help you track income, categorize expenses, and generate reports.
- Digitize Receipts: Use apps like Expensify or Shoeboxed to scan and organize receipts, eliminating the need for a shoebox or drawers full of paper.
- Separate Business and Personal Finances: Open a dedicated business checking account and credit card to avoid confusion and simplify tracking.
- Review Monthly: Set aside time at the end of each month to reconcile expenses, identify missed deductions, and keep everything up to date.
2. Consider Quarterly Estimated Tax Payments
- What should business owners understand about tax deductions and write-offs? What can and should be written off?
.
Work with your CPA through out the year! Remember they can help you identify all the deductions and credits you’re eligible for, ensuring you don’t leave money on the table.
Key Deduction Areas for Salon Professionals:
- Supplies and Tools: Hair products, scissors, and styling equipment.
- Education: Costs for workshops, classes, or certifications.
- Workspace: Home office expenses, if you run a part of your business from home.
- Travel: Mileage and travel expenses for business-related trips.
- Marketing: Costs for social media ads, website hosting, and other promotional efforts.
Stay organized:
- Keep a categorized list of expenses (e.g., equipment, education, rent).
- Save receipts and invoices digitally or in a dedicated folder.
- Track your miles for any business travel.
How can business owners and self-employed stylists learn more about their taxes and ensuring that their businesses are above board?
Preparation is key to avoiding last-minute tax stress and staying above board.
Here’s your checklist:
Organize Receipts and Invoices: Gather proof of deductible expenses like tools, supplies, and education.
Check Tax Brackets: Ensure you know your income bracket and whether you qualify for tax-saving strategies.
Max Out Retirement Contributions: Contributions to an IRA or can lower taxable income.
Review Write-Offs: Don’t miss big deductions! Education, advertising, software, and even your phone bill (if used for business) can be deductible.
As salon professionals, we spend our careers taking care of others, learning more about finance and taking steps to get yourself organized enables you to take care of yourself, not only in 2025 but for years to come!