Running a successful beauty salon is about more than offering stylish cuts, facials, or high-end products—it also means staying compliant with tax regulations. The IRS Audit Technique Guide (ATG) for beauty salons helps examiners assess common industry-specific risks, and salon owners should understand the areas most likely to trigger scrutiny.

Here are the five key aspects the IRS typically focuses on during an audit of a hair or beauty salon—and how to stay compliant.

1. Service Income

What It Is:
Income generated from providing beauty services such as haircuts, coloring, facials, and more.

Why It’s a Red Flag:
If a salon’s reported income per appointment is lower than industry norms, the IRS may suspect underreported income. Examiners will review:

• Appointment books

• Service menus and price lists

• Daily revenue summaries

• Commission payout structures

• Seasonal patterns in service volume

Pro Tip: Ensure all service income is properly documented and reconciled with your bookkeeping system and payment receipts.

2. Retail Income

What It Is:
Revenue from selling beauty products like shampoos, conditioners, skin care items, and styling tools.

Why It’s a Red Flag:
Underreported product sales or inaccurate inventory tracking can signal tax evasion. The IRS will look at:

• Sales receipts

• Inventory logs

• Sales tax returns

• Product ordering history

Pro Tip: Implement a reliable point-of-sale (POS) system that integrates inventory control and generates clean reports for tax preparation.

3. Rental Income

What It Is:
Income from renting out salon booths or chairs to independent stylists.

Why It’s a Red Flag:
Failure to report booth rental income or document agreements may lead to tax issues. The IRS evaluates:

• Rental contracts and lease terms

• Frequency and consistency of rental payments

• Use of salon space and any “underutilized” areas

• Compensation and liability terms in contracts

Pro Tip: Keep written agreements for all booth rentals and report the rental income accurately in your tax filings.

4. Employee vs. Independent Contractor Classification

What It Is:
The employment status of stylists and other salon staff—either as W-2 employees or 1099 independent contractors.

Why It’s a Red Flag:
Misclassifying workers can result in payroll tax penalties. The IRS will assess factors like:

• Who controls work schedules and tools

• How stylists are paid

• Whether they use their own equipment

• Behavioral and financial independence

Pro Tip: Review IRS guidelines for worker classification and consult a tax professional to avoid misclassification risks.

5. Tips

What It Is:
Voluntary cash or credit card tips received by stylists and service providers.

Why It’s a Red Flag:
Because tips are often unrecorded cash payments, they can be easily underreported. The IRS requires:

• Employees to report daily tip income

• Employers to withhold taxes on reported tips

• Proper allocation of unreported tips for large establishments

Pro Tip: Set up a policy and system for employees to record and report tips regularly. Maintain these records in case of an audit.

Final Thoughts

The key to a thriving salon business isn’t just style—it’s compliance and organization. By maintaining accurate and complete financial records, properly classifying workers, and tracking all forms of income, salon owners can reduce the risk of costly audits and penalties.

Need help navigating tax compliance for your salon? We offer professional support tailored to beauty industry businesses. Reach out today to schedule a consultation!