Beauty Business Strategies
The podcast where salon, spa, medspa, barbershop, and lash studio owners — just like you — learn quick tips to make more money, inspire your team, and create world-class client experiences.
Beauty Business Strategies
Why Cash Tips Are Not Coffee Money
Tax talk that actually puts money back in your pocket starts here. We sat down with April McDaniel of Kopsa Otte to decode the new rules on tips for the beauty industry and map out simple steps that protect your income, benefits, and long-term security. From why 100% of tips must be reported to how the new incentives work, we connect the dots so employees and owners can act with confidence.
First, we break down the $25,000 employee tip deduction: who qualifies, how to document tips correctly on a W-2, what “modified adjusted income” means for phaseouts, and why FICA still applies. We also cover special cases like self-employed artists keeping separate tip records, married filing status pitfalls, federal versus state differences, and the 2025–2028 window that makes this a timely priority. The message is clear: clean records now lead to smoother filings and bigger benefits later.
Then we shift to the owner’s playbook. April explains how the long-standing FICA tip credit, claimed on Form 8846, now applies to salons and spas. We detail the payroll and reporting steps that unlock the credit, when minimum wage rules limit eligibility, and how the credit flows through for S corps and partnerships. You’ll hear practical policies that eliminate off-book cash and app tips, ways to leverage salon software for accurate reporting, and a simple compliance framework that stops leaving money on the table.
This conversation champions a mindset shift: tips are not coffee money, they are real income that should fund goals, build credit, and secure benefits. If you’re ready to level up your business, align your team, and claim what the law now offers, this is your roadmap. Subscribe, share with your team, and leave a review to help more beauty pros grow smarter and stronger.
Find out more about April and Kopsa Otte at https://www.kopsaotte.com/
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The Beauty Business Strategies Podcast is designed to give salon, spa, medspa, barbershop, and lash studio owners, just like you, quick tips to make more money, inspire your team, and create world-class client experiences.
Welcome to the Beauty Business Strategies Podcast. I'm Christy Hardy and I am completely honored to be here today with April McDaniel with Copsa Odi to talk about something that is a really important topic and concern and excitement, all of the above for anyone in our beauty industry. And that is the new tax credits and new tax laws around tips. So, April, thank you for joining me today. I am always honored to be in any room with you.
April:Even if it's a Zoom room. Honor for me to be here.
Christy:Love it. April is, for those of you who don't know our partnerships or our friendships, April is a true confidant for strategies. She is our go-to for anything that is related to understanding taxes at a better way. She and her team at Copsa OD Just have always been so impactful and knowledgeable, and we appreciate you so much. So always glad to have you.
April:Yeah, we love strategies. We love thank you. Thank you. You know, whether you're touching clients with your hands because you're actually a technician or you're in the business of being a business coach or an advisor. And I think that's why Copes at OD and Strategies gets together and does such great things together. It's because we we both truly believe in serving people. So that's for sure.
Christy:Yeah. Yeah. Absolutely. Absolutely. My pleasure. All right. So let's dive in. So, you know, I am now working in my role at Strategies. I'm not in the day-to-day with the salons quite as much. Used to run a salon for many, many years and had the challenges of tip reporting and teaching my team the importance of making sure that all tips are recorded. So before we even dive into the tax credit, I know this is like a tender area for some people, but I think it's important that we um take one second to talk about do stylists, aestheticians, anyone in this service industry, beauty service industry, do they need to report their tips, even if they're cash versus credit card?
April:100%. Christy, this is a black and white issue. Even if people want to act like it's not, it is very black and white, very clear in the tax code. 100% of tips that someone receives is considered income. If you're, you know, if you're a solo artist and you're self-employed, then it's self-employment income. If you're an employee, it goes on your W-2. It is part of your income. And the reality of it is it diminishes the value of this industry when we don't do it right. Because what happens is, you know, we have um powers that be that get to decide what schools get student loans. And they don't think people make any money in this industry. And so there's this review process right now, happening right now, that may restrict um, you know, cosmetology schools and massage therapy schools getting student loan aid because they think, why give them any money to do this? They don't make any money. And the reality is you can make a six, seven-figure income doing this, but it's because we're not being honest. And we have to be honest about it. And then the other thing, the other incentivized piece of it, I think, is, you know, you go to draw on social security or Medicaid when you're um when you become disabled, um, God forbid, or you um, you know, just get to that age where you want to retire and get social security and Medicaid. If you haven't put it in, you don't get it. And so you're reducing what you're putting in. You're also limiting the ability to get home loans and car loans and all of those things. So, you know, I can, you know, Christy, where I sit on this issue. I sit right there with you. Yeah. And I can preach about it all day long. But the reality is it's the right thing to do, it's the law. Um, and um, I'm a W-2 earner. I pay tax on every dollar that I make. And that means that I am fully engaged in supporting everything that our taxes support. And I don't think it's fair that someone else doesn't do that. So, you know, get on the bus and let's all work together. Um have a little party and everybody do it right. The other thing that it does is it creates a uniform system between you and the hair place down the street or the massage place down the street. If everybody does it right, then we don't run into this issue where we have employees that are skipping places and moving around because they're told they don't have to pay taxes on their tips. Yeah. So it takes away that it's really not a competitive thing because it's the law, but we do have salon owners that are using it in a competitive way. And it's not, it's not really, it's it you shouldn't be doing that. So thanks for letting me get on my soapbox for a minute. I'm happy now.
Christy:I knew what your answer was going to be before I even asked the question because I feel that way too. I think it's it's really important. And and honestly, uh, you know, quick little stories. When I was in my salon and spa, I had one person who got into a car accident and had to claim disability. And I remember her saying to me, she was she was very honest with me. And she used to write in some of her cash tips, but um, but she said, Christy, at the end of the day, I didn't write in all my tips. Can I can I do it now? And I said, no, you can't. Like, no, you you can't get credit for this now. Um and then when it came to even, you know, COVID hitting and having to lay off 28 people in one day, right? And had to teach my team what it meant to be on unemployment and all of these things. And the same question came up. And I said, I'm sorry that I the preaching that we've done of really making sure you're compliant and and sharing this information with you literally quarterly. We shared the information, um, didn't resonate until the emergency hit. And I think at that point, everyone's light bulb really, really went off where they were like, you know what, if something traumatic does happen again, we need to be prepared. So and I hate to use the fear factor, but it's, you know, it is like you said, it's fairness, it's the law. And and it's something that we really need to be compliant with. And I think this tax credit is the perfect time to continue that conversation of making sure people are compliant because they can't get these, people can't get these tax credits if they're not doing things properly. Right. Right. So something that I, you know, for anyone who hasn't, um, you should definitely watch April's podcast. I you probably can get them right on your website or right on through your your webinars. Your webinars, not your podcast. Um, because you were very educational in sharing what the difference between the two portions of this law are. Can we talk first about the individuals? Like, what are the service providers? What is this tax credit? Um, when do they see the benefit of this? Like, let's talk about the the individual first.
April:The employee first.
Christy:Yeah.
April:Yeah. So the employee first, um, they are eligible for a $25,000 deduction on their tax return uh for tips that they have received. And those tips have to be properly recorded on the W-2. Um so in the correct box on the W-2 to show this tip income. And then they it's a direct reduction to their income on the tax return. Now, there are a couple things um to think about. First, you mentioned it, it's not an immediate benefit, it's something that has to happen when they do their tax return. So, you know, I think there has been some misunderstanding, or possibly just in the different renditions of the bill, it changed over time on how it was going to be done. But the $25,000 tip deduction will be something that as an employee, you're going to work with your tax preparer on. If you're using TurboTax or if you're using some other um system to file your tax return and you're doing it on your own, you're going to need to know how to answer those questions when you're going through that tax return. And there is matching documents that the IRS will look for. Like I said, where it's at on the W-2. If you happen to be self-employed, you also qualify for this 25,000 tip deduction as a self-employed worker in the tipping industry. You also qualify, but you do need to keep um good records as far as what was tipped and what was, you know, for the service, what you got for the service. And that's not something that you've had to do before because if you're self-employed, all of that income really comes into one bucket. And it's all tax the same as far as self-employment income. So it is a little bit different if you're self-employed to keep track of it. But for our W-2 earners, it's um it's really quite straightforward. Uh, you're going to give your W-2 to your tax person, like you always have, um, whatever your tip amount is up to $25,000. You'll get a deduction for that. Now, if you're a high wage earner, let's say you're you make $150,000, um, it does start to phase out for you. So it does get reduced. It's $100 for every thousand dollars that you're over the threshold. So let's say you make $160,000 and you're $10,000 over, it's going to be reduced by, you know, um $100 for every thousand. That's a thousand bucks that it's reused.
Christy:And that's the, so just for calculation's sake, just for clarity for myself. So when you're saying the earning, that is the if you're a on a W you're a W-2 employee, whether it's commission or hourly, plus the tips initially. So if it was $100,000 in in income plus $50,000 income that is tax uh tips, that's your $150,000 versus and it could be some other things, you know.
April:Um, the IRS is still issuing final guidance on these things. You know, the bill gets passed, and then IRS has to make changes to forms and all of that, and the law has to be written. So um it's what it says is modified adjusted income. So there's a chance that that also includes interest income. It might include foreign income, things like that. And so that's why it's gonna be important that you know how to answer the questions if you're doing your own return or if you're going to a CPA. More importantly, maybe this year is a year to do that, is to actually That's what I was just gonna say. I think I would decide that I needed a CPA to this year. They can help you, you know, do that and make sure that you get it right. Um, so those are really the two the two biggest things. And then, of course, to remember that this is a federal deduction. And so, you know, it's not it's not assumed that the state is also going to give you this $25,000 deduction. It's possible that they won't. Each state has to decide what they're going to do. And keep in mind you still owe FIGA tax on it. So the Social Security and Medicare tax still applies to this amount. Um, two other things. If you're married and you decide to file separately, you're not qualified. So you if you're married, you have to file joint. Okay. Or you don't qualify for this. You also don't qualify for the no tax on overtime. If you've heard about that, that's not as much of a deal in this industry. But just to bring that up, you have to, if you're married, you have to file jointly. Otherwise, you don't qualify for those two things. And then yeah, so definitely something to be thinking about. And then the other thing is too this $25,000 deduction is applicable for calendar year 25 through 2028. So the seduction is something that's right now set to be temporary. So we have to think a little bit about that. Um I it's interesting, it's kind of like I don't know, you were you own your own business. And so when you give people something and you try to take it away, it's like you're cutting their fingers off, right? So the same thing happens in government. Once they give something like this, it's really hard for them to take it away. So I'm sure there's going to be all kinds of ongoing debate about it when it comes about in 2028, but it is important that people know that this one um in particular does is set to expire. So okay.
Christy:All right. We're like tests in the waters, it sounds like.
April:Yeah, and I think, you know, I think that they're doing this to try to increase compliance. You know, they want people to be reporting it. They don't want the story like what you're sharing about somebody not being able to get enough a disability. They don't want that story. They don't, you know, I think that not only did it open owners' eyes, it opened government's eyes about, you know, people not having enough in unemployment when the time came when they needed it for something.
Christy:So yes, yes, so true, so true. Yeah, that's a good perspective to have. It's it's it's to cover everybody. It's you know, it and it's not a bad thing to have to be compliant and to put your tips in. Like it's just I don't know. Usually I could get on that circuit.
April:Yes, exactly. Just like I'm proud of where I started versus where I am, when I look at the amount of money that I am able to make, you should be proud of it. And the the interesting thing is is that statistically, when we have cash, we spend it quicker and we don't include it in our overall budget when we consider the things that we want to do. And so if we put that in our overall budget and we think about our goals and our dreams and what we want for the rest of our lives, then it becomes more of a reality. So if your dream is to have that perfect pair of pumps that are six or seven hundred dollars, well, if you include the tips in your budget, you're gonna get there quicker than if you pretend like the tips are just coffee money, you know? Absolutely. Or if you want to go on a on a European vacation, or if your goal is to retire early or you know, be able to take care of your mom or your dad or a sibling or something, guys. You've got to use good money skills and your tips are part of your budget.
Christy:So that is a good point. Absolutely. Absolutely. All right. So let's let's flip the switch a little bit. Let's switch to the owner head. Um, thank you for clarifying for the individuals. Oh, you know what? As let's make it a little bridge. If you are an owner who's also a service provider, do you get to experience the individual and you're gonna get what okay, cool. Yeah, that's great.
April:Now, our owners typically are making a little bit more money, so they might phase out. True, right?
Christy:True.
April:Um, if you're own an owner of a business, you have other things going on. You might have real estate income, you might have you're maybe you're married, and so you have a spouse that's making some money. You know, typically you, if you're an owner, you're a hustler, so you are you're working on building your empire, right? So there's a chance that you could phase out, but you are eligible for it. You're eligible for the $25,000 deduction. And let me just say this too: if you're married and your spouse also receives TIP income, you could be eligible for $50, oh, great.
Christy:Okay. That's great. That's good to know. Yeah, yeah, that's awesome. All right, so let's pivot a little bit. Tell me about the owner side of it. We're still collecting the same, we're we're putting it, processing the tips through payroll. We're making sure that the taxes are paid, both the employee taxes and the employer's portion of the taxes. So that side stays the same right now. But then what happens? What's this tax credit?
April:So the tax credit is something that is done on a form on the tax return of the business at the end of the year. So uh not that the form matters, but it's an 88, 46. It's been around forever because the restaurant industry has been getting this credit for a really, really long time. I think, gosh, I have the date in my head. I want to say it was early 80s, maybe. It's been a long time. Wow. Um, and what what's really exciting about this, uh, first of all, we should thank the PBA. We should thank all those people that advocated to get this credit. I think it's amazing that it happened. And it just shows the ability that we have as people to lobby together to get what we need and what we want, right? So we should remember that when we're thinking about other things that are really important in this country, right? So when we think about the FICA tips tax credit, um, first of all, it's been around for a long time. What happened is that it was expanded to the beauty industry. Um we have a newsletter that went out, I think yesterday or today, that actually listed the other specific industries that it expanded into. But definitely anyone that's um a follower of strategies or of COPESA OD as far as the salon and beauty industry is going to be eligible for this. Um, it requires accurate tip records. So again, we have to go back to the compliance and think about how that's getting reported. Um and there are some forms that the IRS has available if someone's not reporting tips right now that you can use um to help your employees do it. Um, but you also can use the softwares that you have. And all of you, I'm sure, that are listening have great softwares. Um, all of them have the ability to report those cash tips in there. If someone's getting Venmo tips, they need to be reporting them to you. If someone's getting tickets to a Broadway show and that's their tip, the dollar amount of that needs to be reported. That's a tip, okay? Um, if you're trading services for the tip, that's a tip. It still counts, okay? So um first of all, first of all, the accurate tip reporting has to be there through payroll, then on the 941s and on the W3 at the end of the year. The information then on the 45 beat credit is very straightforward. It's the FICA tax, and that's the credit. So, you know, the only thing that could be a little bit different, and we don't see this much in the salons that we work with, because most everyone that we work with, they're even their hourly folks are making over minimum wage. But if you happen to have somebody that's not making minimum wage and you're trying to use that tip amount to get to the minimum wage, the FICA on that does not count towards this credit. Okay. So we don't see that very rarely ever in the beauty industry in our space here at Cope City. But I have had a few people ask me in open forums about that. So I know that it's happening places. Um, but we do see it in the restaurant industry. A lot of times your servers or whoever don't make minimum wage, and so they have um the tips have to help them get there. The owner doesn't get the FICA tip tax credit if in fact they're trying to get to minimum wage with those tips. Okay. So then what will happen is um if you're a pass-through entity, so let's say you're a partnership or an S corporation, um, then that's gonna pass through that credit actually passes through to your personal income tax and it reduces your per your tax on your personal side, is how that will work. Yeah. So just like you today pay tax for the business, you're paying that typically personally because it passes through. Now we do have things like pass through entity tax. We don't have to get through all that, get to that, but we do have some of that or PTE tax, um, where we do get to pay it sometimes at the business level. That's kind of new since um the tax cuts and jobs act in 18. But never mind that we're still gonna pay that tax, we're still gonna get that credit at the personal level when it comes to this credit. And again, there's no, there's no max. Okay.
Christy:That's great. Okay, that's good to know.
April:Whatever you paid, you can get back. Um, but there are, you know, obviously some of those other things that I talked about. So yeah.
Christy:And that's so this is just federal level also. So if there's some certain state taxes, though no, no credits on that, it that or state by state, I guess I should say, right?
April:Yep, state by state.
Christy:Okay. If you had to give like just a little piece of advice to an owner or service provider, team member this year specifically, it's a brand new kind of thought process on this. What would your advice be?
April:Uh I think this is the year to become compliant if you've not been compliant, because there's not you don't have there's not there's no risk to you of losing anything. Yeah, true. So it's not about people, you know, if I say I'd get them now and I wasn't getting them before, yeah, what does that mean? Well, the reality is that if the IRS didn't have a low number of staff, you'd already be very low-hanging fruit and you'd be getting audited now.
Christy:So that was gonna be my next question because I see it all over different forums where they're like, Well, I've been in business for a long time. We haven't been doing this. What is this going to red flag us? Right.
April:Um my first comment to that is shame on you.
Christy:Right.
April:Shame on you. I see it all the time too, Christy, in these public forums on Facebook, people admitting that they are committing tax fraud. Right? I mean, come on. Now, it's one thing if you don't know, and I still think that there is a need for education in this space. And I will do it forever. I absolutely love doing it. And I don't blame someone for not knowing, but at the point where you're making a decision to not do it and you know it's not right, that's an ethical issue. So yeah, yes, and I know you know this, but for the audience, you know, COPSA OD believes in it so much that we will not work with people that are not filing that are not paying tax on their tips. So it is a question that we ask. Now, somebody could lie to me, but I'm gonna figure it out because I can look at their W3s, I can look at their tax return, I can figure it out. But um, it is you have to, you would have to lie to me in order for me to decide that I was gonna work with you for you not to be reporting tips. Otherwise, it's a requirement for us.
Christy:So I think that's great. I mean, I just think that it levels up the integrity of this industry too. We do get, you know, it's like that old school, this is not a career, it's not a uh, you're not owned, you don't really own a company. Yes, you do. You own a company, you own a business, you have team members, you have employees. Like let's level up this incredible industry that has just so much continued growth potential and so so many smart people. Why are we diminishing what we do and the services we provide because it used to be that way? No way, let's level up. So I'm glad you guys do stuff like that because and it is, you know, like running a business, and I I, you know, full transparency, I tried so hard to make sure everyone was compliant, but you literally can't walk in and go into their purse and count how much cash they put in there, right? But I mean, it was we found every which way we could to try to ensure that our teams were compliant in the way that they were um sharing their their cash tips and and whatnot. And it, and you know what? It's it's a job in itself to do, but it's the right thing to do. So as an owner or as a leader in your business, continuing that conversation shouldn't be scary. It shouldn't be, yes, it can be frustrating, but it shouldn't be something because out of frustration you don't do. Um, and we're leaving money on the table if we don't, if we're not complying, especially now. Maybe this will be that light bulb moment for everyone that we've actually left the money on the table for them.
April:For sure. And I I think that you know, people are um people are willing to change if you give them the why. You know, you gotta give them the why and and then you know, hopefully they will do it. But you know, the other thing is is that at the end of the day, you could just tell you could just make a policy that says no cash tips, no venmo tips. Your salon can go no cash, no venmo, everything has to run through. If you're using a product that allows the client to pay the credit card the transaction fee, which there are some products out there that do that now. Um, I'm not gonna say whether that's right or wrong or legal or not, because that's not my position, but there are some really great software products out there that do that. As an owner, you're not out anything. Yeah. So you could definitely go to a no cash, no ven mm, PayPal, all those things. Right. Policy, right? And and then it's just like if you have a policy that they have to wear closed toe shoes. If they show up with closed toe shoes, they get written up, right? If they don't report their tips or they start using cat getting cash, and you are going to know it, they get written up. It's the same process. We just have to be really good business people.
Christy:Yes, yes, yeah. And like you said, like software, even if somebody is paying with cash, you can put the tip onto that software. Like we used to do that. We had that ability too. So yeah. Yeah, there is a way to do it. There is a way to do it for sure. This has been very educational. Thank you. I really appreciate it. I always appreciate every conversation I have with you, but I love learning new things and just seeing how we can continue to level up this industry. And for business owners, like the business owner hat or service provider, because maybe they're just thinking about becoming an independent service provider and so owning their own business. But to be able to educate owners and future owners on the right way to do business is so very important. So we appreciate COPSOD's um continued efforts alongside us. We will constantly be you know flaying those flags of let's make healthy businesses because healthy businesses grow healthy careers, grow healthy futures. So together we're gonna keep doing this, April. Yes, yes, thank you so much, Betsy. You are so welcome. If anyone who is watching would like to hear more from April or talk to April, I'm going to link her email address and the Copes of Odie website in our podcast. Um, we would love for you to have those conversations with her or contact us at Strategies. We can absolutely get you in touch as well. Um, and thank you, April. Cheers to Healthy Beauty Businesses and continued success for all of them. Of course. I wish I had a glass of wine. I know, right? Cheers to my my water and my my stemless wine glass. Cheers.
April:Yeah.
Christy:All right, April. Thank you so much.