Like any other business, restaurants get taxed on multiple fronts. A restaurant can be taxed tens of thousands of dollars per year depending on how profitable it is, where it is located, how big the property is, and how many employees it has.
In order to operate a successful restaurant, you need to know which taxes you must pay, when you must pay them, and how you must file them. Learn everything you need to know about taxes for your restaurant in this ultimate guide.
What Taxes Am I Required to Pay as a Restaurant Owner?
Depending on the business structure (sole proprietor, LLC, S-Corp, etc.) a restaurant's income tax rates can be as high as 30%.
The difference between business success and failure lies in knowing how to prepare and plan your taxes for an industry with slim margins that are only getting thinner due to increasing costs.
Generally, restaurant owners are required to pay taxes to the federal government as well as to their state and local governments. This can amount to tens of thousands of dollars in taxes for many restauranteurs.
Taxes on business and personal income must be paid by restaurant owners. Furthermore, if your state or local government imposes an income tax, you must also pay income taxes to these entities.
Common Taxes Every Restaurant Needs to Pay
Your business will be affected by a few different taxes; each tax applies to a different aspect of your business. These taxes fall into several broad categories explained below.
Business owners and employees of all industries are subject to this tax (as well as any earnings you may receive from a W-2 form). However, depending on the nature of your business and your income level, the rate is different.
Helpful Resource: Federal Income Tax Brackets and Tax Rates
If you own a restaurant, then you are required to pay taxes on every employee's salary (including social security, medicare, and unemployment tax). Payroll taxes consist of two categories, one that is deducted from wages, the other that is paid by employers on salaries. It is also your responsibility as an employer to withhold a certain amount from the employee's salary to ensure that they pay their taxes.
Your employees look to you when it comes to payroll taxes. Employee contributions, schedules of payments, and so on can become very confusing very quickly. Remember to consult a professional tax preparer for assistance.
Taxes on Tips
Hourly wages only account for a small part of the income that front-of-the-house staff receives every week or month. The majority of their wages come from tips, which they depend on in their role as waitstaff. As tips are not fixed, mostly in cash, and sometimes seasonal, it is difficult to estimate the exact amount. In fact, waiters report less than 10% of their total tips as taxable income on average.
As an employer, however, you are responsible for ensuring that your employees report their earned wages. Obviously, nobody wants to assist someone in tax evasion. You can do this by ensuring you report all credit card tips received by employees, using a point-of-sale system that prompts employees to declare cash tips when they close their shifts, and more.
You operate a restaurant on or within a property. Whether it's a standalone building, inside of a mall, or inside of a retail store, whatever the location, you have to pay property taxes.
Even if you lease the property and do not own it, you are responsible for some portion of the property tax. How much you owe depends on your lease agreement. There are various rates depending on your location and state. Your property value also plays a role. Tax rates are also subject to fluctuation. As a tenant, you should be aware of the annual percentage you owe.
How Business Structure Affects Restaurant Taxes
As you plan your restaurant, you'll need to consider how you want to structure your business. How you structure your business will affect how you are taxed.
The following is a breakdown of the different types of business structures and their taxation. For help deciding which structure is best for your new business, talk to a business attorney or a tax accountant.
As a sole proprietor, you are considered to be one and the same entity as your business. The two are one and the same. This results in the combination of business and personal taxes.
You will pay the lowest tax rate if you structure your business as a sole proprietorship. The downside is that you are also personally liable for the business.
A partnership can be formed when two or more people jointly own a business. As a partner, you will file a partnership income tax return as well as your own personal tax return with your share of business income and loss.
Due to the partnership structure, only the partners are taxed, so the business is not taxed separately.
Limited Liability Company
Limited liability companies (LLC) merge the advantages of a corporation and a partnership. They are owned by the members and share in the profits.
Members of limited liability companies file personal tax returns. Although you are subject to self-employment tax, any surplus earnings are not taxed.
A C Corp allows a business to operate as an independent entity owned by shareholders. A C corporation shields owners from personal liability, but its profits are taxable. Consequently, the business's profits are taxed both at the business level and at the personal level (first when a profit is made, and then when dividends are distributed).
S corporations afford businesses the same level of limited liability as C corporations without having to worry about double taxation. S corporations pass on profits and losses from their businesses to their owners' personal tax returns.
Helpful Resource: S-Corp vs C-Corp
Restaurant Sales Tax
As a restaurant owner, you are essentially the middleman between your customers and local or state tax authorities. Each transaction relies on you to collect and remit the correct amount of sales tax.
Furthermore, they require you to file sales tax returns multiple times a year, which include a breakdown of all your taxable sales and purchases. The process is confusing, difficult, and mistakes can cost you dearly.
Are you required to put aside a certain amount of money? Calculating your sales tax rate isn't always easy.
Because of confusing tax laws, you need to do your homework, determine your state and local tax rates, and keep detailed records.
Helpful Resource: What is sales tax?
To comply with sales tax, you must understand what sales tax means for your restaurant. Review local laws and determine:
- Tax rates and responsibilities in your state, city, and county
- How to accurately calculate tax rates for each of your locations
- Tax schedules and deadlines for all local taxing authorities
- Which tax forms you need to fill out and where to send them
- How to configure your register software with accurate sales tax rates
It may sound complicated, but it is. However, there is good news: you do not have to do everything yourself. You need to seek the advice of an accountant who has experience filing taxes for restaurants like yours.
Reporting Taxes on Tips
Your job as an employer is to make sure tipped employees pay taxes. In addition, you need to make sure you're complying with the IRS's reporting, withholding, and payment requirements.
It is important to remember that tipped employees can only be taxed if their tipped wages are over $30 per month. Over that amount, you must withhold Social Security, Medicare, and income taxes from employee wages.
In addition, you will have to pay the employer's share of FICA and FUTA taxes on the tips.
Helpful Resource: Guide to Taxes for Tips
Reporting Tips to the IRS
The Internal Revenue Service requires you to report all of your employees' income (including tips).
Due to the fact that most restaurant employees receive tips in cash, it can be difficult to track how much they earn in tips. In order to make sure your employees are reporting their correct earnings, enforce a rule requiring them to submit tip reports for every tipped employee at the end of every pay period. This will enable you to keep better track of what they earn in tips.
If you run a large food or beverage business, when it is time to file your taxes for tipped employees with the IRS, you'll need to use IRS form 8027.
According to the IRS, a restaurant must fill out form 8027 if:
- Tipping your employees is customary
- You employee 10 or more workers on a typical business day
Eight Percent Rule
According to the IRS, a minimum of eight percent of a worker's gross income can be submitted as tips.
Although many restaurant employees earn 15 to 20 percent tips per check, most restaurant owners adhere to the 8 percent rule.
Reporting Credit Card Tips
Credit card tips are much easier to manage for restaurant owners. The Point of Sale System, which tracks every credit card transaction, allows employers to see detailed reports of every tip employees receive.
Owners of restaurants can easily report tip income since they can keep track of the total amount of credit card tips received by each employee. They can also report state and federal tax deductions more accurately.
To keep a record of tips your employees receive regularly, you can also use the tax form 4070 A.
When reporting tipped wages, you'll need the following information:
- Employee’s name and address
- Social security number of employee
- Period the report covers (Maximum 1 Month)
- Total tips received (Both direct or indirect)
Tax Deductions for Restaurant Owners
There can be a lot of restaurant taxes to pay. Paying state, local, and federal taxes is difficult in an industry with relatively thin profit margins. Restaurant owners can reduce their income tax burden by taking advantage of a number of deductions.
It is possible for restaurant owners to deduct marketing expenses. This may include advertising through traditional print, radio, and television media as well as online marketing through social media and other platforms. A strong marketing plan is essential for the success of a restaurant - and it can also help you reduce your taxes.
There are other expenses that may be deductible as well. Legal fees related to running your restaurant may also be included as well as tax preparation fees to meet your tax obligations. There are also certain types of insurance that are deductible for restaurant owners, including business auto insurance, commercial general liability insurance, and employee health insurance.
In addition, restaurant owners can deduct wages and other expenses related to staffing. The ability to deduct staffing costs can reduce your taxes, even if you still have to pay payroll taxes on employee wages.
Also, the cost of preparing and serving food can be deducted from your taxes. Equipment, food, utensils, menus, napkins, and serving ware can all be deducted.
Common Tax Deductions for Restaurants
Restaurant owners can generally deduct the following business expenses when filing their income tax returns with the IRS:
- Food costs including raw ingredients, packaged/canned foods, oil, sugar, spices, etc.
- Beverages, such as bottled water, soda, beer, wine, liquor, milk, juice, etc.
- Kitchen appliances such as pots, pans, ovens, microwaves, toasters, blenders, dishwashing machines, platters, soap, etc.
- Supplies such as plates, bowls, cups, utensils, paper products, cloth napkins, table condiments, etc.
- Salaries, health insurance, pension plans, sick time, vacation time, and bonuses for cooks, servers, hosts, bartenders, dishwashers, etc.
- Employee gifts up to $25 per year per person
- Expenses related to the maintenance of your restaurant location
- A variety of equipment, such as tables, chairs, barstools, computers, lighting fixtures, window displays, decorations for restaurants, menus, office supplies, and other related items.
- Fees for accounting, legal, merchant processing, and other professional services required to effectively run your restaurant business
- The policies you need to protect your restaurant's physical location(s), employees, and customers
- Expenses associated with marketing and advertising, such as coupons, flyers, a website, Google AdWords, and other marketing opportunities.
Tax laws are complicated, of course. Restaurant owners should track all expenses related to their restaurants and work with an accountant, lawyer, or other tax professional to ensure that they are paying taxes correctly - and getting every possible deduction that they are entitled to under the law.
Why All Restaurants Are at Risk for an Audit
A quarter of food service establishments are noncompliant. Considering that statistic, it shouldn't come as a surprise that restaurants are popular targets for tax compliance audits. However, what would cause your local tax authority to pay attention to your restaurant?
Helpful Resource: What Triggers an IRS Audit? 5 Tax Return Red Flags For Businesses
The following are three of the most common reasons restaurants are audited:
Many cash transactions
Are you more likely to be audited if you accept cash? The main reason is that it's more difficult to prove how much money comes and goes. In addition, there are typically more human errors involved in calculations and counting, which results in more frequent errors in reporting.
High turnover of employees
It is well known that the bar and restaurant industry has a high turnover of employees. This presents its own set of challenges, as well as being inspected by tax authorities. A restaurant that receives calls reporting tax violations from disgruntled ex-employees will certainly find itself on an auditor's radar pretty quickly.
Does your restaurant serve fresh seafood or top-shelf liquors? Spillage and spoilage associated with volatile inventory that costs a lot are likely to attract auditor scrutiny.
Get Help With Your Restaurant Taxes
Taxes can range from federal to state and local, depending on your location, profits, and number of employees. It is a good idea to work with an accountant to ensure that your taxes are paid in full and on time. For restaurants, payroll services and a tracking system are also beneficial to ensure that their records are complete come tax time.
Taxes, including those on restaurants, will always be an issue for small businesses. Knowing income tax, payroll tax, sales tax, and tips taxes will enable you to effectively navigate the world of taxation.
Talk to a tax expert when tax season rolls around so they can advise you on details that may save you money. You'll want to make sure you are aware of any new tax deductions that apply to your business so you don't pay too much tax.
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