Thriving Stylist Podcast - Episode #366 Summary: IRS Tax Announcement and Its Impact on Stylists and Salon Owners

Release Date: December 16, 2024
Host: Britt Seva, Social Media & Marketing Strategist for Hair Stylists

I. Introduction: Understanding the Evolving Tax Landscape

In Episode #366 of the Thriving Stylist Podcast, host Britt Seva delves into a critical and often daunting topic for hairstylists and salon owners: the recent IRS tax announcements and their potential implications. Recognizing that taxes and IRS audits are not the most engaging subjects, Britt emphasizes their importance in safeguarding one’s business and financial health.

“These things are important because the other things that’s not fun is an audit or paying back taxes or worse.” (00:05)

II. IRS Announcement: Leveraging AI for Enhanced Audit Processes

A. Inspiration Behind the Episode

Britt attributes the episode's focus to insights shared by her network, particularly a message from Carly, a Certified Coach at Thriver Society, and an informative Instagram post by Modern Chic Accounting.

“I got a little message from Thriver Society Certified Coach Carly and she said, hey, somebody that I really respect posted about some changes coming out of the IRS and I think it’s important that we have this conversation.” (00:10)

B. Modern Chic Accounting’s Insights on AI-Driven Audits

Modern Chic Accounting revealed that the IRS is now utilizing Artificial Intelligence (AI) to sift through tax records and initiate audits more efficiently. Their November 24, 2024, Instagram post outlines five key patterns AI targets to identify potential tax fraud:

1. Income Underreporting and Mismatch
   “If they believe that somebody is under reporting what they made, there is a potential for audit.” (00:45)

2. Unusual Deductions or Credits
   Britt warns against exaggerated or unconventional deductions, such as purchasing luxury vehicles solely for tax write-offs, which can attract IRS scrutiny.

3. Abnormal Cash Flow Patterns
   Discrepancies in reported income versus actual cash flow can signal irregularities.

4. Patterns of Non-Filing or Late Filing
   Stylists and salon owners are reminded of their obligations to file quarterly taxes if they are independent contractors or business owners.

5. Unusual Behavior or Risk Indicators
   Any atypical financial behavior can increase audit chances.

Modern Chic Accounting further advises:

• Organize and Update Books: “Get your books organized and up to date, uploaded and correctly code your transactions and reconcile your accounts.” (01:20)
• Professional Bookkeeping: Investing in professional bookkeeping can prevent costly errors and potential audits.
• Accurate Income Reporting and Expense Qualification: Ensuring all income is reported and expenses are legitimate is paramount.
• Maintain Documentation: Keeping thorough records, receipts, and invoices helps substantiate tax filings.

III. Britt’s Personal Experience with an IRS Audit

Britt shares her firsthand encounter with an IRS audit in 2024, attributing it to an error made by a previous CPA rather than any fraudulent activity on her part.

“We, as a company, underwent an audit in 2024, and it’s the first business audit I’ve ever had.” (02:50)

A. Audit Details and Resolution

The audit revealed a misallocation of a quarterly payment by her former CPA, which was incorrectly recorded as a prepayment for the upcoming year. This clerical error led to confusion, resulting in an unexpected audit and a back tax payment.

“It was something like an old CPA filed it not as a Q4 payment, and it wasn’t done fraudulently, just by mistake.” (03:30)

Despite the stress, Britt emphasizes that meticulous bookkeeping facilitated a smooth resolution. Her experience underscores the importance of maintaining accurate financial records and having trustworthy accounting professionals.

IV. Expansion of IRS AI Audits and Implications for Stylists

A. IRS’s Strategic Focus

The IRS plans to expand its AI-driven audit capabilities, aiming to more than double the number of audits by 2026.

“In 2023, AI helped the IRS recover $1.3 billion in overdue taxes from recent taxpayers. By 2026, the agency expects its use of AI to more than double the number of individuals and corporate taxpayers it selects to audit.” (04:10)

B. The 1099 Matching Program

A significant component of the IRS’s enhanced auditing strategy is the 1099 Matching Program, which poses particular concerns for salon owners and independent stylists who operate under 1099 contracts.

• Targeting Single 1099 Filers:
  Individuals who file only a 1099-MISC as personal taxpayers, common among booth renters and independent contractors, are at heightened risk.

• Multiple Tax Forms from the Same Employer:
  Stylists who receive both W-2 and 1099 forms from the same salon can trigger audit flags.

“If you are an independent stylist, meaning you are in a studio suite or a booth renter or you’re a salon owner, you do need to be filing quarterly taxes.” (01:20)

C. Potential Impact on the Beauty Industry

Britt expresses concern that the IRS’s focus on higher income businesses and those with complex tax structures, such as LLCs filing as S-corps, could disproportionately affect stylists and salon owners who may already be grappling with intricate financial arrangements.

“If there's a 1099 at play and it's just between a singular stylist and their salon owner, that is what this program is looking for.” (06:10)

V. Employee Retention Credit (ERC) and Its Complications

A. Overview of ERC

The Employee Retention Credit (ERC) was introduced as a refundable tax credit for businesses affected by the COVID-19 pandemic, providing financial relief to eligible employers.

“The employee retention credit, or the employee retention tax credit, is a refundable tax credit for certain eligible businesses that had employees and were affected during the COVID-19 pandemic.” (08:10)

B. Salon Owners’ Experiences with ERC

Britt highlights varied outcomes among salon owners who applied for ERC:

• Successful Claims:
  Some received partial or full payments, which significantly aided their businesses.

• Unfulfilled Expectations:
  Others faced delays or non-receipt of expected funds, leading to operational challenges.

• Fraud Concerns:
  Instances of fraudulent claims led to the IRS reassessing previous ERC payouts, with firms now seeking to reclaim erroneously distributed funds.

“A lot of people DM’d me and they said, I applied, I never got my payment. A lot said, I applied and I got two of my three payments.” (07:30)

C. Future Implications and Precautions

Given the rampant fraud within the ERC program, there is an emerging risk for businesses that received credits without legitimate eligibility. Companies are now being advised to verify their ERC claims to avoid potential repercussions.

“If you received erc, there are companies specifically who are like, we can help you protect yourself from the ERC you redeemed or something like that.” (09:10)

VI. Recommendations for Stylists and Salon Owners

Britt underscores the necessity for salon professionals to proactively manage their finances to navigate the complex tax landscape effectively.

A. Emphasize Professional Bookkeeping and Accounting

• Invest in Expertise:
  Hiring professional bookkeepers and CPAs can prevent errors that lead to audits.

“It’s one of the better investments that you make.” (00:55)

• Maintain Separate Business Accounts:
  Using separate business bank accounts and business-only credit cards simplifies tracking and documentation.

“Please, please, please tell me that you’re buying salon supplies on a business only credit card.” (03:20)

B. Steps to Avoid Tax Audits

1. Accurate Income Reporting: Ensure all income is reported without underreporting or mismatches.
2. Legitimate Deductions: Claim only legitimate business expenses and avoid excessive or unusual deductions.
3. Timely Filings: Adhere to quarterly tax filings if required, and meet all deadlines to prevent non-filing or late filing issues.
4. Documentation: Keep meticulous records of all financial transactions, receipts, and invoices to substantiate tax filings.

“Keep documentation, receipts and record of payments, invoices, et cetera.” (06:00)

C. Enhance Financial Literacy and Compliance

Britt encourages salon owners to educate themselves on tax laws and utilize available resources to ensure compliance.

“Make sure that you are paying things legally, doing things above board.” (09:45)

VII. Conclusion: Staying Informed and Prepared

Britt wraps up the episode by reiterating the importance of staying informed about IRS developments and maintaining robust financial practices. She urges listeners to leverage resources like previous podcast episodes, seek professional financial advice, and engage with the Thriving Stylist community for support and guidance.

“We are living in a time where things might start catching up to us and so I just think it’s important to be aware.” (10:30)

Britt also invites listeners to connect via ratings, reviews, and direct messages on Instagram to continue the conversation and seek further assistance.

“Happy business building and I’ll see you on the next one.” (10:45)

Key Takeaways:

• IRS is Enhancing Audit Capabilities with AI: Stylists and salon owners must ensure meticulous financial record-keeping to avoid audit triggers.

• Importance of Professional Accounting: Investing in professional bookkeeping and accounting services is crucial for accurate tax filings and avoiding costly mistakes.

• ERC Complications: While ERC provided much-needed relief during the pandemic, its susceptibility to fraud poses ongoing risks for businesses that claimed credits.

• Proactive Financial Management: Staying informed, maintaining separate business accounts, and understanding tax obligations are essential for sustaining and growing a successful salon business.

By proactively addressing these areas, hairstylists and salon owners can better navigate the evolving tax environment and continue to thrive in the competitive beauty industry.