Industry Norms vs. Regulations
- Vien Vo, CPA
- Jun 6
- 3 min read
Recently, there is a very interesting tax case within the Vietnamese nail salon business community. The case could lead to meaningful changes in how many nail salons operate going forward. While there has been extensive discussion and debate surrounding the matter, much of the commentary has been based on misunderstandings of the underlying facts and tax issues. I would like to share my perspective and hopefully provide some clarity regarding the case.
Link to Case
Case Reference
The case involves the owners of a nationwide nail salon business who pleaded guilty to federal tax crimes.
Facts of the Case
1. Audit period: 2016–2024 (8 years)
2. Audit target: Approximately 60 nail salons owned by Vinh and Thanh
3. A significant portion of compensation paid to nail technicians was distributed in cash.
4. Total cash compensation paid: Approximately $116 million
5. Estimated tax loss: Approximately $32 million
What Happened?
For many years, it was common for nail technicians to request that their compensation be paid partially through reported wages and partially in cash. In many cases, technicians wanted up to 50% of their compensation reported on either a Form W-2 or Form 1099 and the remaining 50% paid in cash. If a salon owner refused this arrangement, technicians could easily move to another salon willing to accommodate the practice. Over time, this became an informal but widespread practice within parts of the nail salon industry.
The primary motivation for technicians was tax reduction. By reporting only a portion of their earnings, they reduced their federal income taxes and payroll taxes, including Social Security tax, and Medicare tax. In addition, reporting lower income sometimes enabled individuals to qualify for certain federal and state benefit programs and tax credits that might not have been available at their actual income levels, such as the Earned Income Tax Credit (EITC) and certain healthcare assistance programs.
How Was the Cash Compensation Financed?
Historically, cash receipts represented approximately 40% to 60% of total salon revenue. Owners could use these cash receipts directly to pay the cash portion of technician compensation.
However, customer payment habits have changed significantly. Today, most customers pay using credit cards, debit cards, Zelle, Venmo, and other electronic payment methods. As a result, cash receipts have declined to approximately 15% to 20% of total revenue.
Because most revenue is now deposited directly into business bank accounts, salon owners who continued the practice of paying technicians partially in cash often had to withdraw funds from their business accounts to cover the cash portion of compensation.
This created a significant tax and recordkeeping problem. Without proper payroll records or documentation supporting the cash payments, owners often lacked sufficient evidence to substantiate these compensation expenses for tax purposes. Consequently, they faced the risk of losing otherwise legitimate business deductions while still bearing the burden of operating the business. Meanwhile, the technicians benefited from reduced tax liabilities due to underreported income.
Many owners found themselves trapped in this cycle. Refusing to participate in the practice often made it difficult to recruit and retain technicians in a highly competitive labor market, particularly in areas where such arrangements had become commonplace.
Conclusion
This case highlights the conflict that can arise when longstanding industry practices are inconsistent with existing tax laws. Regardless of how common a practice may become within an industry; widespread acceptance does not make it legally compliant. The case serves as a reminder that both employers and workers remain responsible for accurately reporting income and compensation, even when market pressures and industry norms encourage different behavior.
By: Vien Vo, CPA
May 5th, 2026
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