Hiring staff at your nail salon: what the owner must do

The day you first pay someone, your legal role changes. Before that you were a tech, or an owner working alone. From that day you are an employer: you withhold tax from someone else's pay, hand that money over on a schedule you do not choose, carry workers' compensation under your state's rules, and keep records for years.

This guide runs in the order the work arrives: before you hire, day one, every payday, every quarter, year end. If you are still at the licensing stage for the shop itself, start with opening a nail salon.

Before you hire: get an EIN#

An EIN is the tax ID for the business, the way a Social Security number is the ID for a person. The IRS lists hiring employees as one of the common reasons a business needs one. Three things from the IRS application page:

• It is free. The IRS states: "Beware of websites that charge for an EIN. You never have to pay a fee for an EIN." Plenty of sites are built to look official and will charge you for fifteen minutes of your own typing.
• It is immediate, if you apply online and the application is approved.
• One per day. The IRS issues "only 1 EIN per responsible party per day." The online application is also open only certain hours, not around the clock.

Day one: four pieces of paperwork#

All four belong before the first paycheck, not after it.

Form I-9, work authorization#

The IRS states: "All U.S. employers must properly complete Form I-9 for every individual they hire for employment in the United States." You keep the completed form in your own files rather than mailing it anywhere. That is not the same as it being private: I-9s are subject to government inspection, the notice before an inspection can be short, and the folder has to be in order on an ordinary Tuesday rather than after a week of preparation.

Three limits on how you complete it, and all three exist to protect the worker from you:

• You may not tell a new hire which documents to bring. The worker chooses from the list of acceptable documents, and naming the one you want is document abuse.
• You may not refuse documents that reasonably appear genuine and relate to the person handing them over, and you may not ask for extra papers on top of them.
• You may not re-verify someone early, or make them redo the form, because you have started wondering about them.

Each of those is unlawful on its own, and the worker it usually happens to is a work-authorized immigrant who speaks English with an accent.

Form W-4, so you know what to withhold#

The IRS says to ask every new employee for a signed Form W-4 when they start work. If they do not give you a completed one, the IRS instruction is to withhold as if that employee is single.

A Social Security number, and an ITIN will not do#

The IRS states that you are required to get each employee's name and Social Security number and enter them on Form W-2, and is explicit that an employer must not accept an ITIN in place of an SSN for employee identification or for work. This guide owes you the plain sentence instead of the euphemism: an ITIN is a tax number, not permission to work, and no form turns one into work authorization. If a worker cannot complete the I-9 with documents showing identity and authorization to work, you cannot lawfully employ them, and the real options are not hiring, or ending an employment that has already started. Background in SSN and ITIN.

The rule runs the other way too, and this is the half owners break. You may not fire a worker, demand extra or different documents, or put them through their paperwork again on a suspicion about their status, their accent, their name, or where they were born. Acting on a suspicion is itself unlawful, including when the suspicion turns out to be correct. Act on documents, and on written notices addressed to you, never on a feeling about someone.

New hire reporting, within 20 days#

Most small salon owners have never heard of this one. The federal Office of Child Support Services states: "Federal law requires employers to report basic information on new and rehired employees within 20 days of hire to the state where the new employees work. Some states require it sooner." Seven data elements are required: the employee's name, address and Social Security number; the date of hire, meaning the date they first perform services for pay; and the employer's name, address and federal EIN.

Know what you are filing. The same page says the information goes into the National Directory of New Hires, which child support agencies use to locate a parent. That is the machinery described from the other side in child support: an order against an absent parent finds a paycheck through exactly this report. It is not an immigration filing, and both you and the worker are entitled to know what it is.

Every payday: what you withhold, what you add#

This is the part owners most often blur together. Some money is withheld from the worker's pay. Other money is added out of the shop's pocket.

Withheld from the worker's pay:

• Federal income tax, figured from that worker's Form W-4
• 6.2% Social Security tax
• 1.45% Medicare tax
• An extra 0.9% Additional Medicare Tax on wages above $200,000 in a calendar year

Paid by the shop, on top:

• 6.2% Social Security tax, matching the worker's share
• 1.45% Medicare tax, matching the worker's share
• Federal unemployment tax (FUTA)

The rates come from IRS Topic 751: "The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total", with Medicare at 1.45% each side. Social Security has a wage base limit, and for earnings in 2026 the IRS puts it at $184,500, and for 2027 the Social Security Administration has announced $192,300; Medicare has none. On the Additional Medicare Tax the IRS is specific that there is no employer match, so you withhold it but do not double it.

FUTA works differently. The IRS states: "You pay FUTA tax only from your own funds. Employees do not pay this tax or have it withheld from their pay." The rate is 6.0% on the first $7,000 of each employee's wages for the year, and a credit of up to 5.4% is available against it, which takes the rate down to 0.6%.

That credit is not automatic, and this is where a new shop loses real money. Topic 759: "You're entitled to the maximum credit if you paid your state unemployment taxes in full, by the due date of your Form 940, and on all the same wages as are subject to FUTA tax and the state isn't determined to be a credit reduction state." Three conditions, and the first one assumes you registered with the state at all. The Form 940 instructions put a date on it: the state money has to be in by February 2 (or February 10, if that is your 940 due date), "regardless of whether state law defers the payment of taxes due until after this date." Miss it and you pay 6.0% instead of 0.6%, which on one employee at the $7,000 base is $420 rather than $42.

The wage floor and overtime come before any of the tax above#

Everything on this page so far is about tax, and tax is not the biggest number an owner can get wrong. Wage and hour is. The Department of Labor publishes a flyer for this exact trade, and its first line to the worker is "As a nail salon worker you have the right to be paid full and fair wages for all hours you work."

The part that catches salons is that how you pay does not change what you owe. From the same flyer: "Even if you are paid by the day or at a piece rate, your total wages must amount to at least the federal minimum wage for each hour worked." And on overtime: "Generally, you must be paid 1-1/2 times your regular rate of pay after 40 hours of work in a seven-day workweek."

So a flat $120 a day, or 60% commission per service, is a way of calculating pay, not an exemption from the floor. The regulations say so for each:

• Day rate, 29 CFR 778.112: the regular rate is the week's total divided by hours actually worked, and "He is then entitled to extra half-time pay at this rate for all hours worked in excess of 40 in the workweek."
• Commission, 29 CFR 778.117: commissions "are payments for hours worked and must be included in the regular rate", however they are calculated and whatever else the worker is paid.

Hours are counted whether or not you asked for them: "You must be paid for all work performed whether or not the employer approves the work in advance. This includes time spent in training, traveling from site to site during the day, and any work performed 'off the clock.'" And the flyer states the duty that makes all of it provable: "Employers are required to keep accurate records of all their employees' daily and weekly hours worked and wages paid."

The full worker-side rules, including what a workweek is and how the regular rate is figured, are in pay and overtime. Read it as the owner: it is the page a tech will be handed if this ever goes wrong.

Tips: the part of the wage every rule above has been counting short#

In a nail salon tips are usually most of what a worker earns, and once tips are in the picture every number above changes. The IRS treats tips as wages: the employee reports them to you, you withhold on them, and you owe the employer's share of Social Security and Medicare on them exactly as on ordinary pay.

The employee reports tips to you, by the 10th#

Publication 15 (2026 edition) sets the rule: "Your employee must report cash tips to you by the 10th of the month after the month the tips are received." Cash tips here means cash, check, debit card and credit card, including charged tips you paid over to the worker and tips they received from other staff under a tip-sharing arrangement. In any month a worker receives less than $20, no report is required.

Form 4070, which people still ask about, is no longer current. Publication 531 says so directly: "Form 4070 and Form 4070A are historical." No form is required in its place, but if your shop already runs a 4070A tip log, do not scrap it: the same publication says the previous revisions "are still available on the Prior Year Forms and Instructions page", and they still do the job. If you do not give staff a reporting method of your own, the employee must hand you a statement, signed and dated, carrying their name, address and SSN, your name and address, the month and year it covers (or the start and end dates, if it covers less than a full month), and the total tips for that period.

Withholding on tips, and the order when the paycheck cannot cover it#

The sentence that sets your deposit clock: "Tips are considered to be paid at the time the employee reports them to you." Not when the customer left the money. When the worker reports it.

The situation that actually bites in a nail salon is a small hourly wage against large tips, leaving too little in the paycheck to take the tax from. Publication 15 has an ordering rule for exactly that: withhold on regular wages and other compensation first, then Social Security and Medicare on tips, and income tax on tips last. And if by the 10th of the following month there are still not enough of the employee's funds to deduct from, "you no longer have to collect it." What you could not collect goes in box 12 of the W-2, code "A" for Social Security and code "B" for Medicare, with a negative adjustment on line 9 of Form 941.

Tips an employee reports to you in writing, $20 or more in a month, are also subject to federal unemployment tax (FUTA).

The 45B credit: as of tax year 2025 it finally reaches nail salons#

This is the most valuable paragraph on the page, and almost no owner knows it. The employer's share of Social Security and Medicare that you pay on tips can be claimed back in part as a credit on Form 8846. Until recently that credit was for restaurants. Form 8846 now states, under What's New: "For tax years beginning after 2024, the tax credit was extended to certain beauty service businesses."

The form's Who Should File section names the trades, including "barbering and hair care, nail care, esthetics, or body and spa treatment services, if tipping of employees for providing such services is customary." A nail salon is inside that list. The form works the credit out as 7.65% of creditable tips, and creditable is the word that decides how much you actually get. The form's own instructions say a beauty service employer "cannot claim the credit for taxes on any tips that are used to meet the federal minimum wage rate currently in effect, of $7.25 an hour", so the reported tips are reduced, per employee per month, by the gap between $7.25 an hour for the hours worked and the cash wages (excluding tips) you actually paid. The flip side is the good news: "If you pay these tipped employees wages (excluding tips) equal to or more than $7.25 an hour, enter zero on line 2", and then every reported tip counts. Note the floor is $7.25 for beauty businesses, not the $5.15 a restaurant uses, so do not borrow a restaurant's worked example.

If you ran payroll and paid tax on tips for tax year 2025, ask your tax preparer about Form 8846 before the return goes in. And if that return is already filed, it is not lost: the form says you "can claim or elect not to claim the credit any time within 3 years from the due date of your return on either your original return or on an amended return."

"No tax on tips" does not lighten your FICA#

P.L. 119-21 lets employees and self-employed individuals deduct up to $25,000 of qualified tips on their income tax returns, for tax years beginning after 2024 and ending before 2029. The IRS adds that the deduction "phases out if your modified adjusted gross income is over $150,000; $300,000 for joint filers." Two things owners get wrong about it:

• It belongs to the employee and it works on income tax. Publication 15 states the rest plainly: "Tips are still generally subject to both the employer share and employee share of social security tax and Medicare tax if the tips received are $20 or more per month." Your side does not change.
• A mandatory service charge is not a tip. "Mandatory service charges added to the bill are not qualified tips." An amount the salon adds to the bill itself is wages, both for tax and for this deduction.

If an employee gives you an updated Form W-4 so their withholding reflects the deduction, you have to use it.

Minimum wage and the tip credit, and the eight places where there isn't one#

Federal law lets an employer pay a cash wage as low as $2.13 an hour and count tips toward the minimum, up to a $5.12 tip credit, as long as cash plus tips clears the federal minimum. There is a second condition, and missing it costs owners far more. Before you take the credit you must tell the worker the cash wage, the credit you are claiming, that the credit cannot exceed the tips actually received, and that they keep all their tips apart from a valid pool. The Department of Labor is blunt about what happens otherwise: "An employer that fails to provide the required information cannot take the section 3(m)(2)(A) tip credit." Not a fine on top. No credit at all, which means the full minimum wage for every hour already worked.

But the state decides, and for much of the Vietnamese nail-salon population the answer is that there is no tip credit at all. The Department of Labor's table, revised July 1, 2026, puts eight jurisdictions in the category "State requires employers to pay tipped employees full state minimum wage before tips": Alaska, California, Guam, Minnesota, Montana, Nevada, Oregon and Washington. (Montana appears in two sales tiers; the $110,000 line changes which minimum wage applies, not whether a tip credit exists. Neither tier has one.) In those places you pay the full state minimum in cash and the tips sit on top, uncounted.

Whose tips they are, and what you may never do with them#

The tax rules above are about paperwork. This one is about ownership, and it is the most litigated question in the trade. Fact Sheet 15B: "The FLSA prohibits an employer from keeping tips and from allowing a manager or supervisor to keep any portion of other employees' tips for any purpose. The FLSA, for example, prohibits a manager or supervisor from receiving tips from a tip pool or tip jar, because tip pools and tip jars include other employees' tips. This prohibition applies whether or not the employer pays tipped employees with a tip credit."

Owners read that and assume it is about someone else. It is not. The same fact sheet: "Business owners who own at least a bona fide 20 percent equity interest in the enterprise in which they are employed and who are actively engaged in its management also satisfy the executive duties test. Under the tip provisions of the FLSA, these employees are managers or supervisors who may not keep other employees' tips."

If you own the shop and work in it, you are on that list.

If you run a tip pool, the money cannot sit. Fact Sheet 15: "When an employer collects tips to administer a tip pool, the employer must fully distribute any collected tips at the regular payday for the workweek", and where the amount genuinely cannot be worked out before payroll runs, "as soon as practicable after the regular payday." Holding a share back to even out quiet weeks is not permitted. The worker-side rules on who may be in a pool are in pay and overtime.

When the tip is on a card#

Two rules, and shops get both wrong. Fact Sheet 15 allows the processing fee to come off: where a card company "charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA." But only the real fee, and no more: "the employer cannot reduce the amount of tips paid to the employee by any amount greater than the transactional fee charged by the credit card company, regardless of whether or not it takes a tip credit." A flat 5% house charge on every card tip is not the fee, it is a keeping violation.

And it cannot wait for the money to land: "the amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company."

The Department of Labor adds a caution worth carrying: "Some states may have more protective laws regarding tips charged to credit cards which do not allow the employer to deduct credit card fees from employees' tips." Ask your state before you deduct anything.

Where tips land on the W-2 and the 941, and why your staff need you to get this right#

Reported tips do not go in one box. The IRS tip reporting page: "Tips reported to the employer by the employee must be included in Box 1 (Wages, tips, other compensation), Box 5 (Medicare wages and tips), and Box 7 (Social security tips) of the employee's Form W-2." On Form 941 the matching line is 5b, taxable social security tips.

Then the new part, and this is the one that decides whether your staff actually get the deduction described above: "Employers must separately report the total amount of cash tips reported to the employer on Form W-2 (Box 12, code TP) and include the applicable Treasury Tipped Occupation Code(s) in Box 14b."

Your workers' code is 605. The IRS list of tipped occupations gives the row as "605 | Manicurists and pedicurists | Clean and shape customers' fingernails and toenails; may polish or decorate nails. | Nail technician, fingernail sculptor, nail painter | 39-5092".

If you leave box 12 code TP and box 14b empty, the $25,000 deduction is not something your techs can claim on their own. They will hear about it, expect it, and find it is not on their W-2. Tell your payroll provider the code before the January filing, not after.

Depositing: the timing matters more than owners expect#

Withholding the money is not the obligation. Handing it over on schedule is, and the IRS requires federal tax deposits to be made by electronic funds transfer.

Which schedule you are on#

There are two schedules, monthly and semiweekly, and you do not pick yours. It is set by how much tax you reported during a prior window called the lookback period: the four quarters the IRS looks back at to size you up, running from July two years ago to June of last year for a Form 941 filer. Publication 15: report $50,000 or less for that period and you are a monthly schedule depositor; more than $50,000 and you are semiweekly.

If you are opening now, that window is empty, and Publication 15 answers the question directly: "New employers. For Form 941 filers, your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero. Therefore, you're a monthly schedule depositor for the first calendar year of your business." So in year one you are monthly, unless the $100,000 next-day rule below catches you.

One more thing to do before the first payday rather than on it: "You must use EFT to make all federal tax deposits." That means enrolling in EFTPS, which is not instant, because the PIN arrives by mail. Do it when the EIN arrives.

• Monthly: deposit taxes on payments made during a month by the 15th day of the following month.
• Semiweekly: deposit taxes for payments made Wednesday, Thursday or Friday by the following Wednesday, and for payments made Saturday, Sunday, Monday or Tuesday by the following Friday.

Two rules cut across both. Accumulate "$100,000 or more in taxes on any day" and Publication 15 requires the deposit by the next business day whichever schedule you are on. Running the other way, if your Form 941 total tax liability for the current or prior quarter is under $2,500 and you did not trigger that $100,000 obligation, Publication 15 lets you pay with the return instead of depositing on schedule.

Late deposits are penalized on a ladder#

Read the two ways off the ladder first, because a small shop that misses one deposit often qualifies for one of them. Publication 15 says the penalties "don't apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect", and that the IRS may waive the penalty the first time you are required to make a deposit, if the failure was inadvertent.

The table itself, applied to the amount deposited late:

• 2% for deposits made 1 to 5 days late
• 5% for deposits made 6 to 15 days late
• 10% for deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due, and for amounts that should have been deposited but were paid directly to the IRS instead
• 15% for amounts still unpaid more than 10 days after the IRS's first notice

A heavier one sits behind those. Tax withheld from a worker's pay is called trust fund tax, because it is someone else's money in your hands. Publication 15 states the trust fund recovery penalty is 100% of the unpaid trust fund tax, and that if it cannot be collected from the business it may be imposed on the people the IRS finds responsible for collecting and paying it over, who acted willfully. That reaches a person, not only an LLC.

Every quarter and every year end: four forms#

• Form 941, filed quarterly, due April 30, July 31, October 31 and January 31. If you deposited all tax when due, the IRS lets you file by May 10, August 10, November 10 or February 10 instead. Some employers receive written notice from the IRS to file the annual Form 944; file 944 only if you received that notification, so do not switch on your own.
• Form 940, filed annually for FUTA. The IRS states that FUTA deposits are required for a quarter in which the tax due exceeds $500, due by the end of the month following that quarter.
• Form W-2, one per employee, "required to be furnished to employees and filed with SSA by January 31." That date arrives faster than owners plan for.
• Form W-3, the summary that accompanies the W-2s.

On who has to file Form 940 at all, IRS Topic 759 gives a general test: wages of $1,500 or more in any calendar quarter in either of the two relevant years, or one or more employees for at least some part of a day in 20 or more different weeks in either year. The two years shift with each filing year, so check Topic 759 for yours (checked September 21, 2026).

The W-2 you issue is the document the worker reads about in pay stub and W-2. If it is wrong, they find out.

Workers' compensation is state law, not federal law#

This is the section where this guide deliberately refuses to give you a number. Workers' compensation for the employees of a private salon is not a federal program. The US Department of Labor states: "Individuals injured on the job while employed by private companies or state and local government agencies should contact their state workers' compensation board."

So every question you actually have is a state question: how many employees before coverage is mandatory, whether booth renters count toward that number, whether you buy from a private carrier or a state fund, and what the penalty is for operating without it.

There is no national figure here, and anyone who hands you one is guessing. Call the workers' compensation agency in the state where the salon sits. The worker's side of the same subject is getting hurt at work.

Paying cash to skip payroll tax: what happens to the owner#

In this trade that is a live risk, not a hypothetical, so here it is plainly and without a lecture.

When the IRS concludes that a person you paid in cash, or handed a 1099, was actually an employee, Publication 15 says you are generally liable for the Social Security, Medicare and withheld income tax. A reduced-rate mechanism exists under section 3509 of the tax code, with three features worth reading twice:

• The rates depend on whether you filed the required Forms 1099. Not filing puts you on the higher ones.
• If tax is paid under section 3509, you cannot recover the employee's share from the employee. You absorb it.
• Those reduced rates are not available if you intentionally disregarded the requirement to withhold.

The IRS classification page puts it in one sentence: "If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker."

The worker also has an independent route: Form SS-8 asking the IRS to determine their status, or Form 8919 to report Social Security and Medicare tax that was never withheld. Either puts your shop's arrangement in front of the IRS, and they do not need your permission.

First, check whether Section 530 already covers you#

If the shop has been handing out 1099s, evaluate this before the VCSP, because it is free and it reaches the years already behind you. The IRS classification page carries a relief provisions section pointing to Publication 1976, on section 530 of the Revenue Act of 1978. In outline: an employer who had a reasonable basis for treating workers as independent contractors, treated those workers and every similar worker that way consistently, and filed all the required Forms 1099 for them, can be relieved of the employment tax for them. The conditions are exact, and Publication 1976 is where they are stated, so read it, or put it in front of a tax professional, before you conclude you owe years of back tax.

The difference between the two routes is worth holding in mind: section 530 relief costs nothing and looks backward, while the program below costs 10 percent and only fixes the future.

If you want to fix it going forward#

The IRS runs the Voluntary Classification Settlement Program, which lets an employer reclassify workers as employees for future tax periods with partial relief from federal employment taxes. Per the IRS page:

• You apply on Form 8952, and the IRS says to file it at least 120 days before the date you want to start treating the workers as employees
• You must have consistently treated those workers as independent contractors, including having filed all required Forms 1099 for them for the previous three years
• You are not eligible if you are currently under IRS employment tax audit, or under a Department of Labor or state agency audit concerning worker classification
• A participating employer pays 10 percent of the employment tax liability that would have been due on that compensation for the most recent tax year, figured at the reduced section 3509(a) rates

One cost is not on the IRS page, and in some shops it decides the question. The VCSP is an application: it puts the shop's list of workers, and how you have been paying them, in front of a federal agency in writing and under your name. If someone on that list is not authorized to work, that disclosure is not an administrative step for them, it is the whole event. Know who is on the list before you enroll anyone, and give the people involved the chance to get their own advice first.

Read that third condition again as well. The door closes once an audit has started, which makes this early work rather than crisis work.

How long to keep the records#

Two laws, two clocks. Keep to the longer one.

• IRS Publication 15: "Keep all records of employment taxes for at least 4 years." That covers your EIN, amounts and dates of all wage payments, tips employees reported, each employee's name, address, SSN and occupation, dates of employment, and the withholding certificates.
• Department of Labor, under the FLSA: payroll records are preserved for at least three years, while time cards, piecework tickets, wage rate tables and work schedules are kept for two years.

The DOL's list for each nonexempt worker includes hours worked each day, total hours each workweek, the regular hourly rate, straight-time and overtime earnings, all additions to or deductions from wages, total wages each pay period, and the date of payment with the period it covers. If you are not yet recording hours, that is this week's job. The wage and hour side is in pay and overtime.

Next steps#

1. Get an EIN on the IRS site, free, before you pay anyone.
2. Keep Form I-9 and Form W-4 in one folder at the desk and complete them on a new hire's first day.
3. Report every new hire to your state within 20 days, or sooner if your state requires it.
4. Call your state workers' compensation agency with two questions: at how many employees is coverage required, and where do I buy it.
5. Work out whether you are a monthly or semiweekly depositor, put those dates on a recurring calendar, and mark January 31 for Forms W-2.
6. If the shop is paying cash, or issuing 1099s to people who work as employees, read the VCSP section above and decide your move before a letter arrives.

Everything on the trade sits together on the nail industry page.