II 

109TH CONGRESS 

1ST SESSION S. 327 

To amend the Internal Revenue Code of 1986 to expand the tip credit 

to certain employers and to promote tax compliance. 

IN THE SENATE OF THE UNITED STATES 

FEBRUARY 9, 2005 

Mr. SANTORUM (for himself and Mrs. LINCOLN) introduced the following bill; 

which was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to expand 

the tip credit to certain employers and to promote tax 

compliance. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Small Business Tax 

5 Equalization and Compliance Act of 2005’’. 
2 

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1 SEC. 2. EXPANSION OF CREDIT FOR PORTION OF SOCIAL 

2 SECURITY TAXES PAID WITH RESPECT TO 

3 EMPLOYEE TIPS. 

4 (a) EXPANSION OF CREDIT TO OTHER LINES OF

5 BUSINESS.—Paragraph (2) of section 45B(b) of the Inter6 nal Revenue Code of 1986 is amended to read as follows: 

7 ‘‘(2) APPLICATION ONLY TO CERTAIN LINES OF

8 BUSINESS.—In applying paragraph (1), there shall 

9 be taken into account only tips received from cus10 tomers or clients in connection with— 

11 ‘‘(A) the providing, delivering, or serving 

12 of food or beverages for consumption if the tip13 ping of employees delivering or serving food or 

14 beverages by customers is customary, or 

15 ‘‘(B) the providing of any cosmetology 

16 service for customers or clients at a facility li17 censed to provide such service if the tipping of 

18 employees providing such service is cus19 tomary.’’. 

20 (b) DEFINITION OF COSMETOLOGY SERVICE.—Sec21 tion 45B of such Code is amended by redesignating sub22 sections (c) and (d) as subsections (d) and (e), respec23 tively, and by inserting after subsection (b) the following 

24 new subsection: 

25 ‘‘(c) COSMETOLOGY SERVICE.—For purposes of this 

26 section, the term ‘cosmetology service’ means— 
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1 ‘‘(1) hairdressing, 

2 ‘‘(2) haircutting, 

3 ‘‘(3) manicures and pedicures, 

4 ‘‘(4) body waxing, facials, mud packs, wraps, 

5 and other similar skin treatments, and 

6 ‘‘(5) any other beauty related service provided 

7 at a facility at which a majority of the services pro8 vided (as determined on the basis of gross revenue) 

9 are described in paragraphs (1) through (4).’’. 

10 (c) EFFECTIVE DATE.—The amendments made by 

11 this section shall apply to tips received for services per12 formed after December 31, 2004. 

13 SEC. 3. INFORMATION REPORTING AND TAXPAYER EDU14 CATION FOR PROVIDERS OF COSMETOLOGY 

15 SERVICES. 

16 (a) IN GENERAL.—Subpart B of part III of sub17 chapter A of chapter 61 of the Internal Revenue Code of 

18 1986 is amended by inserting after section 6050T the fol19 lowing new section: 

20 ‘‘SEC. 6050U. RETURNS RELATING TO COSMETOLOGY SERV21 ICES AND INFORMATION TO BE PROVIDED TO 

22 COSMETOLOGISTS. 

23 ‘‘(a) IN GENERAL.—Every person (referred to in this 

24 section as a ‘reporting person’) who— 
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1 ‘‘(1) employs 1 or more cosmetologists to pro2 vide any cosmetology service, 

3 ‘‘(2) rents a chair to 1 or more cosmetologists 

4 to provide any cosmetology service on at least 5 cal5 endar days during a calendar year, or 

6 ‘‘(3) in connection with its trade or business or 

7 rental activity, otherwise receives compensation 

8 from, or pays compensation to, 1 or more cosmetolo9 gists for the right to provide cosmetology services to, 

10 or for cosmetology services provided to, third-party 

11 patrons, shall comply with the return requirements 

12 of subsection (b) and the taxpayer education require13 ments of subsection (c). 

14 ‘‘(b) RETURN REQUIREMENTS.—The return require15 ments of this subsection are met by a reporting person 

16 if the requirements of each of the following paragraphs 

17 applicable to such person are met. 

18 ‘‘(1) EMPLOYEES.—In the case of a reporting 

19 person who employs 1 or more cosmetologists to pro20 vide cosmetology services, the requirements of this 

21 paragraph are met if such person meets the require22 ments of sections 6051 (relating to receipts for em23 ployees) and 6053(b) (relating to tip reporting) with 

24 respect to each such employee. 
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1 ‘‘(2) INDEPENDENT CONTRACTORS.—In the 

2 case of a reporting person who pays compensation to 

3 1 or more cosmetologists (other than as employees) 

4 for cosmetology services provided to third-party pa5 trons, the requirements of this paragraph are met if 

6 such person meets the applicable requirements of 

7 section 6041 (relating to returns filed by persons 

8 making payments of $600 or more in the course of 

9 a trade or business), section 6041A (relating to re10 turns to be filed by service-recipients who pay more 

11 than $600 in a calendar year for services from a 

12 service provider), and each other provision of this 

13 subpart that may be applicable to such compensa14 tion. 

15 ‘‘(3) CHAIR RENTERS.— 

16 ‘‘(A) IN GENERAL.—In the case of a re17 porting person who receives rent or other fees 

18 or compensation from 1 or more cosmetologists 

19 for use of a chair or for rights to provide any 

20 cosmetology service at a salon or other similar 

21 facility for more than 5 days in a calendar year, 

22 the requirements of this paragraph are met if 

23 such person— 

24 ‘‘(i) makes a return, according to the 

25 forms or regulations prescribed by the Sec-
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1 retary, setting forth the name, address, 

2 and TIN of each such cosmetologist and 

3 the amount received from each such cos4 metologist, and 

5 ‘‘(ii) furnishes to each cosmetologist 

6 whose name is required to be set forth on 

7 such return a written statement showing— 

8 ‘‘(I) the name, address, and 

9 phone number of the information con10 tact of the reporting person, 

11 ‘‘(II) the amount received from 

12 such cosmetologist, and 

13 ‘‘(III) a statement informing 

14 such cosmetologist that (as required 

15 by this section), the reporting person 

16 has advised the Internal Revenue 

17 Service that the cosmetologist pro18 vided cosmetology services during the 

19 calendar year to which the statement 

20 relates. 

21 ‘‘(B) METHOD AND TIME FOR PROVIDING

22 STATEMENT.—The written statement required 

23 by clause (ii) of subparagraph (A) shall be fur24 nished (either in person or by first-class mail 

25 which includes adequate notice that the state-
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1 ment or information is enclosed) to the person 

2 on or before January 31 of the year following 

3 the calendar year for which the return under 

4 clause (i) of subparagraph (A) is to be made. 

5 ‘‘(c) TAXPAYER EDUCATION REQUIREMENTS.—In 

6 the case of a reporting person who is required to provide 

7 a statement pursuant to subsection (b), the requirements 

8 of this subsection are met if such person provides to each 

9 such cosmetologist annually a publication, as designated 

10 by the Secretary, describing— 

11 ‘‘(1) in the case of an employee, the tax and tip 

12 reporting obligations of employees, and 

13 ‘‘(2) in the case of a cosmetologist who is not 

14 an employee of the reporting person, the tax obliga15 tions of independent contractors or proprietorships. 

16 The publications shall be furnished either in person or by 

17 first-class mail which includes adequate notice that the 

18 publication is enclosed. 

19 ‘‘(d) DEFINITIONS.—For purposes of this section— 

20 ‘‘(1) COSMETOLOGIST.— 

21 ‘‘(A) IN GENERAL.—The term ‘cosmetolo22 gist’ means an individual who provides any cos23 metology service. 

24 ‘‘(B) ANTI-AVOIDANCE RULE.—The Sec25 retary may by regulation or ruling expand the 
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1 term ‘cosmetologist’ to include any entity or ar2 rangement if the Secretary determines that en3 tities are being formed to circumvent the re4 porting requirements of this section. 

5 ‘‘(2) COSMETOLOGY SERVICE.—The term ‘cos6 metology service’ has the meaning given to such 

7 term by section 45B(c). 

8 ‘‘(3) CHAIR.—The term ‘chair’ includes a chair, 

9 booth, or other furniture or equipment from which 

10 an individual provides a cosmetology service (deter11 mined without regard to whether the cosmetologist 

12 is entitled to use a specific chair, booth, or other 

13 similar furniture or equipment or has an exclusive 

14 right to use any such chair, booth, or other similar 

15 furniture or equipment). 

16 ‘‘(e) EXCEPTIONS FOR CERTAIN EMPLOYEES.—Sub17 section (c) shall not apply to a reporting person with re18 spect to an employee who is employed in a capacity for 

19 which tipping (or sharing tips) is not customary.’’. 

20 (b) CONFORMING AMENDMENTS.— 

21 (1) Section 6724(d)(1)(B) of such Code (relat22 ing to the definition of information returns) is 

23 amended by redesignating clauses (xiii) through 

24 (xviii) as clauses (xiv) through (xix), respectively and 
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1 by inserting after clause (xii) the following new 

2 clause: 

3 ‘‘(xiii) section 6050U(a) (relating to 

4 returns by cosmetology service pro5 viders).’’. 

6 (2) Section 6724(d)(2) of such Code is amend7 ed— 

8 (A) by striking ‘‘or’’ at the end of subpara9 graph (AA), 

10 (B) by striking the period at the end of 

11 subparagraph (BB) and inserting ‘‘, or’’, and 

12 (C) by inserting after subparagraph (BB) 

13 the following new subparagraph: 

14 ‘‘(CC) subsections (b)(3)(A)(ii) and (c) of 

15 section 6050U (relating to cosmetology service 

16 providers) even if the recipient is not a payee.’’. 

17 (3) The table of sections for subpart B of part 

18 III of subchapter A of chapter 61 of the Internal 

19 Revenue Code of 1986 is amended by adding after 

20 section 6050T the following new item: 

‘‘Sec. 6050U. Returns relating to cosmetology services and information to be 

provided to cosmetologists.’’. 

21 (c) EFFECTIVE DATE.—The amendments made by 

22 this section shall apply to calendar years after 2004. 

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