The Internal Revenue Service provides hair stylists with multiple options for reducing taxable income by allowing deductions for ordinary and necessary business expenses. Just how much and what you can deduct depends on whether you're a bona fide employee, and therefore receive a W-2 Wage and Tax Statement, or an independent contractor who receives a 1099-MISC at year's end.
Ordinary and Necessary Business Expenses
The IRS separates the terms "ordinary" and "necessary" in its definition:
- Ordinary expenses are those commonly incurred and accepted in your trade. Examples include license and booth rental fees, insurance and supplies such as shears and hair dryers.
- Necessary expenses are those that are not mandatory, but are helpful to your trade. These include expenses such as continuing education classes, business cards and advertising expenses.
You can deduct only out-of-pocket expenses, not those reimbursed by your employer. In addition, you'll need to report all qualified unreimbursed expenses as a lump sum on Line 21 of Schedule A (Form 1040) and will benefit from the deduction only to the extent that the lump sum you report exceeds two percent of your adjusted gross income.
If you rent a booth at an established business and therefore are considered as an independent contractor, you'll list qualifying business expenses as separate amounts in Part II of Schedule C Profit or Loss From a Business. In this scenario, the entire amount of all eligible business expenses qualifies.
Tax Deduction Categories
It may be easier to understand just what you're allowed to deduct by categorizing ordinary and necessary expenses related to your profession.
Professional expenses include out-of-pocket costs for license renewals, liability insurance and taxes. Also falling into this category are magazine and trade publication subscriptions, industry association memberships, fees to attend trade shows and seminars, continuing education expenses and chair rental fees if you're an independent contractor.
Equipment and Supplies
Equipment and supplies tax deductions include costs for business and office supplies. Examples of business expenses are "tools of the trade" and equipment maintenance costs, towels, smocks and aprons. Office supply deductions generally only are available to independent contractors.
Allowable advertising deductions include expenses ranging from postage to Internet and website maintenance fees. Business cards, brochures and gifts for clients also are included.
Mileage incurred driving to and from work isn't a legitimate deduction. However, if you use your car for business reasons during business hours, or to attend an after-hours association meeting or a trade show, you can deduct that mileage as a business expense.
If you use a company car solely for business travel, you use the standard mileage rate for calculating the deduction. However, if you a personal vehicle for both business and personal purposes, IRS rules say you must use the actual mileage option for calculating the deduction.