This tool assumes the salon is a sole proprietorship (or a single-member LLC, which is taxed the same way). The owner reports the shop’s profit on Schedule C, and pays self-employment tax (15.3%) on the entire net profit, plus regular income tax. The owner also gets the 20% QBI deduction (§199A) on qualified profit.

It does not model an S-corporation. An S-corp owner pays themselves a “reasonable” W-2 salary (subject to payroll tax) and takes the rest as distributions that are not subject to self-employment/payroll tax — which can reduce the total payroll-tax bill. In exchange, an S-corp requires running payroll for the owner, filing Form 1120-S, extra accounting cost, and the IRS scrutinizes whether the salary is genuinely “reasonable.” Because of the SE-tax difference, an S-corp owner’s actual tax is usually lower than what this tool shows.

State income tax is the hardest piece to model exactly: 9 states have none, about 15 use a flat rate, and the rest (plus D.C.) use graduated brackets. This tool applies a single rate per state — exact for no-tax and flat states, and a reasonable estimate for graduated states. Local city/county income taxes (NYC, Maryland counties, many PA & OH municipalities, etc.) are not included.

Each state sets its own 2026 minimum wage. Many states still follow the federal $7.25/hr floor; the rest set a higher rate, ranging up to $17.95/hr in D.C. Pick a state to see its 2026 rate — this is the wage floor the tool uses when “Use min wage” is selected. Cities and counties can set higher local minimums (Seattle, NYC, many CA cities) that aren’t reflected here.

Pick a state to see when workers’ comp becomes mandatory for a nail salon and the rough cost. Owners/partners usually don’t count toward the threshold, but part-time and seasonal employees do.

A growing number of states require employers who don’t already offer a retirement plan to enroll workers in a state-run auto-IRA. The owner pays almost nothing — money comes out of the employee’s paycheck into their own Roth IRA, and no employer match is required. It’s a payroll-setup duty, not a cost. Offering your own 401(k) or SIMPLE IRA satisfies the mandate instead.

For tax years 2025–2028, the One Big Beautiful Bill Act created a deduction for qualified tips. A worker in a tipped occupation can deduct their tips — up to $25,000 per return — when figuring federal income tax, whether or not they itemize. The deduction phases out by $100 for every $1,000 of MAGI above $150,000 (single) / $300,000 (MFJ).

Key limits the tool applies:
• It’s a federal income-tax deduction only. FICA / self-employment tax still applies to every tip dollar, and most states still tax tips.
• Only voluntary cash/charged tips qualify — not mandatory service charges or auto-gratuities.
• The worker’s occupation must be on the IRS list of customarily-tipped jobs (2024). Nail techs / cosmetologists qualify.
• Applies to W-2 employees and 1099 contractors alike (reported via W-2 Box 12, Form 1099-NEC, or Form 4137).

When tips are paid by card/POS, they’re fully reported and run through payroll. For a W-2 tech, the employer must pay 7.65% employer FICA on tips just like on wages. But IRC §45B lets the employer claim that FICA back as a federal income-tax credit — for the tips above the amount needed to bring the employee to $5.15/hr (the 1996 federal minimum wage the statute still freezes for this purpose).

Because nail techs are typically already paid at/above minimum wage, essentially all tips sit above that floor, so the credit returns nearly the entire employer FICA on tips. The result: the real cost for a compliant salon to report POS tips is close to $0 — and the tool models it that way (charge FICA on tips, then subtract the §45B credit).

How the tool applies it:
• Card processing (~3%) is charged on both revenue and tips (the processor bills on the full swiped amount).
• Tips are paid 100% to the tech; to the owner they’re a pass-through that triggers only employer FICA (largely refunded by §45B).
• §45B applies to W-2 only; with 1099 the contractor bears everything.

Non-exempt employees (nail techs qualify) must be paid 1.5× their regular rate for hours over 40 in a week (FLSA §7), on top of at least the state minimum wage. The 2026 OBBBA “no tax on overtime” rule (§225) lets W-2 workers deduct the premium half of overtime — up to $12,500 (single) / $25,000 (MFJ), phasing out above $150k / $300k MAGI. FICA still applies to all overtime; 1099 contractors don’t get this deduction.

Beyond wages, an employer owes several payroll taxes and costs the tool calculates automatically:

Employer FICA — 7.65% of wages (6.2% Social Security + 1.45% Medicare), matching what the employee pays.
FUTA — federal unemployment, 6.0% on the first $7,000 of each tech's wages, reduced to an effective 0.6% (about $42/tech) when state unemployment is paid on time. Filed on Form 940.
SUTA — state unemployment, set by each state's wage base and your experience rating. New employers typically pay around 2.7%; the rate can run roughly 1–8% depending on layoff history. Wage bases range from $7,000 to $78,200 (WA).
Workers' comp — required in most states once you cross that state's employee threshold; the salon class (NCCI 9586) typically runs about $0.50 per $100 of payroll but varies widely by state. See the “Workers’ comp requirement by state” tile for your state's threshold and rate.
Payroll service + bookkeeping — roughly $45 per tech per month to run payroll, file returns, and keep books.

1099 contractors carry none of these for the shop — which is the real financial pull toward misclassification, and exactly why it's illegal and audited.

Flags fire on patterns the IRS actually scrutinizes for personal-service shops: implausible Schedule C expense ratios, large refundable credits claimed against income driven artificially low, a high earner paying almost no tax, missing tip income, or W-2 wages below the legal minimum. These aren’t accusations — they’re the same signals behind real prosecutions. The takeaway is always: report fully, deduct only what’s real.