How Much Should a Hair Stylist Set Aside for Taxes?

If you rent a booth or a suite, or you cut hair on your own, nobody takes taxes out of your money. Every dollar that hits your account looks like yours. It isn't all yours. Some of it belongs to the IRS and, in most states, to your state too.

That's the whole problem in one sentence. Here's a simple way to handle it.

The rule of thumb: 25 to 30 percent of your profit

A common rule of thumb for self-employed people is to set aside 25 to 30 percent of profit for taxes. Profit, not sales. We'll get to why that word matters in a second.

Why so much? Because when you work for yourself, you pay two kinds of tax on what you earn:

• Self-employment tax. This covers Social Security and Medicare. When you were a W-2 employee, your employer paid half of it. Now you pay both halves.
• Income tax. Federal, and state if your state has one. Georgia does.

Stack those together and 25 to 30 percent is a reasonable place to start for a lot of stylists and barbers. Your real number could be lower if your income is modest and you have a lot of deductions. It could be higher if you had a big year. Only your CPA can tell you where you land, and it's worth asking them once a year.

Why “of profit” matters so much

Say you brought in $8,000 in services and tips this month. You also paid $1,200 in booth rent, $600 in color and product, $150 in booking and card fees, and $100 for a class.

Your profit isn't $8,000. It's $5,950. You're taxed on the $5,950.

Setting aside 30 percent of $8,000 is $2,400. Setting aside 30 percent of $5,950 is $1,785. That's a $615 difference in one month, and it's the reason tracking your expenses is worth real money. Every expense you forget to record makes your profit look bigger than it was, which means more tax than you owe. We wrote a whole guide on what stylists and barbers usually deduct.

A simple system that actually sticks

You don't need a spreadsheet. You need a second account and a habit.

1. Open a separate savings account. Call it “Taxes.” Most banks let you open one in the app in a few minutes. Keep it at a different bank if you're tempted to dip into it.
2. Move money every time you get paid. When your Square, Vagaro or GlossGenius payout lands, move your percentage over. If you get paid daily, do it weekly on the same day. Sunday night works for a lot of people.
3. Use your profit percentage, not your sales percentage. If you know your expenses run about a quarter of your sales, 30 percent of profit is roughly 22 percent of sales. Pick a sales percentage that lands close and adjust once you see real numbers.
4. Check it against your books once a month. This is where monthly bookkeeping pays off. When your books close, you see your actual profit and can top the account up or ease off.

Want a starting number right now? Our free tax calculator for stylists and barbers turns your monthly sales and expenses into a set-aside amount and a quarterly estimate. Our clients see that number on their monthly report, based on their real profit for the month. It takes the guessing out of step three.

Quarterly estimated taxes

Setting money aside is half of it. The other half is sending some of it in during the year. The IRS expects self-employed people who will owe more than a small amount at tax time to pay estimated taxes four times a year, usually in April, June, September and January. Many states have a similar schedule.

If you skip them, you may owe a penalty on top of the tax, even if you pay everything in April. Your CPA can tell you whether you need to pay quarterly, how much each payment should be, and the easiest way to send it. A lot of CPAs will simply hand you four vouchers or set up the payments with you.

If you don't have a CPA yet, this is a good reason to find one. We work alongside your CPA and hand them clean books at tax time.

What changes the number

• How well you track expenses. This one matters most, and it’s the one you control.
• Your state. Some states have no income tax. Georgia does.
• Your household. A spouse's W-2 income, kids and other income all shift your bracket. Your CPA accounts for this.
• How your business is set up. Some stylists save real money by switching to an S corp. It isn't right for everyone and it comes with payroll and extra filings, so talk it through with your CPA first.

The short version

• Start by setting aside 25 to 30 percent of your profit.
• Put it in a separate account every time you get paid.
• Track every business expense so your profit is real, not inflated.
• Ask your CPA about quarterly payments, and your actual percentage.

Clean books make every step of this easier, because you always know your real profit. If you'd rather not do that part yourself, that's what we do.

We provide bookkeeping and financial reporting services only. We do not provide tax filing or tax advisory services. We work alongside your CPA or tax professional. Nothing here is tax or legal advice. Talk to your CPA about your situation.