S. 1998 — Small Business Tax Fairness and Compliance Simplification Act

This section expands the employer Social Security tax credit for employee tips under IRC §45B—previously limited to food or beverage service establishments where tipping is customary—to also include beauty service establishments (i.e., providing barbering and hair care, nail care, esthetics, or body and spa treatments) where tipping is customary, provided the aggregate tips from such services exceed 15% of the establishment's gross receipts from those services. (As background, the credit equals the employer-paid portion of Social Security taxes on employee cash tips, taken into account only to the extent tips plus the employee's direct wages equal or exceed the excess of the applicable federal minimum hourly wage rate over the minimum wage rate for employees receiving tips.) The section also modifies the applicable federal minimum wage rate for credit calculation purposes to the current rate under FLSA §6(a)(1) without regard to the tip credit allowance under §3(m) for beauty services (from the rate as in effect on January 1, 2007), while retaining the January 1, 2007, rate for food and beverage establishments. The changes apply to taxable years beginning after December 31, 2024.

This section establishes a safe harbor from IRS tip examinations of employers (except examinations of current or former employees) who employ individuals receiving tips attributable to beauty services (as defined in IRC §45B), provided the employer (1) implements an educational program on tip reporting laws for new employees (verbal explanation and written materials) and existing employees (quarterly), (2) establishes procedures for tipped employees to report monthly cash and charged tips of at least $20 under IRC §6053(a), (3) complies with all federal tax filing, collection, and payment requirements related to employee tip income, and (4) maintains related employee records (contact information, gross receipts from tipping services, and charge receipts) for at least four calendar years. The provision applies to taxable years beginning after December 31, 2025. (Thus, tips from such beauty services count as FICA wages under IRC §3121(q) without triggering employer-level IRS audits if these conditions are met.)

This section establishes a new information reporting requirement (IRC §6050AA) for any person receiving, in the course of a trade or business, rental payments aggregating $600 or more in a calendar year from two or more individuals providing beauty services (as defined in §45B(e)) for space leased to serve third-party patrons. Recipients must file an annual return with the IRS containing each renter's name, address, TIN, aggregate payments, and payment details and furnish a statement to each renter by January 31 of the following year, with the requirement applying to payments made after December 31, 2025.