Knowing which restaurant taxes you’ll be responsible for, when those taxes are due, and how to file them is essential knowledge for every restaurant owner. You’ll need to be well-versed in restaurant taxes to ensure that you’re withholding the appropriate amounts from your employees’ paychecks, and you may want to offer some guidance to your serving staff on how to properly report tips when tax time rolls around.

How Much Taxes Do You Need to Pay as a Restaurant Owner?

Generally, restaurant owners must pay taxes to both the federal government and their respective state and municipal governments. Many business owners may end up paying tens of thousands of dollars in more taxes a year as a result.

There is the matter of the federal income tax, which eatery owners must pay on both their business and personal profits. Additionally, you may also be obliged to pay income taxes to your state or local government. As a second point, remember that federal payroll taxes must be paid on employee earnings if you have any.

Medicare, Unemployment Insurance, and Social Security are just a few of the things that fall under this category of taxation, which may range from 2.9% to 12.0%. Both employees and employers contribute to these taxes. Employees’ contributions are deducted from their paychecks and paid to the IRS, while employers’ contributions are made by the business directly. Employers must account for workers’ gratuities and service charges as taxable income in accordance with federal law.

Also, companies are required to contribute to workers’ state unemployment insurance funds. Disability insurance plans may also be subject to taxation in some states. The tax rate and maximum tax liability are both conditional on factors such as the location of the business, the kind of the business, and the level of expertise of the employees.

Another factor is that sales and use tax must be paid to the state and/or local government by most restaurant operators. The amount varies by location, with sales tax being mandatory in 45 states and DC. Only Alaska, Delaware, Montana, New Hampshire, and Oregon do not levy a statewide sales tax; however, municipalities inside Alaska are permitted to levy sales taxes.

Taxes on purchases at these levels are around normal. The amount of tax you must pay might be very different based on where you live. To provide just one example, the combined sales tax on food and drink in New York City brings the total to 8.25%. With this increase, the effective New York City restaurant tax is 8.875%. The total tax rate is likely to be far lower in other parts of New York.

Please note that the aforementioned amounts reflect sales taxes. While many areas include restaurant purchases in their general sales tax calculations, others have a different tax structure in place for alcoholic drinks and food sold in bars and restaurants. To make sure you’re paying the right amount of tax in your city and state, it’s important to see a tax specialist, as shown by the wide range of tax rates available.

As a possible fifth category of tax, health taxes may be due for some business owners in the restaurant industry. Soda and other sugary beverages face this divisive kind of taxation because of their association with obesity and other health problems. As was said before, one example of a health tax is a disparity in the sales tax between soft drinks and other beverages. The local government is the typical levy of such charges.

Read more: How To Reduce Accounting Overhead For Your Restaurant

How to File Tax for Restaurant?

You can save yourself a lot of time and stress as a restaurant owner if you take the time to manage your paperwork and receipts. File all receipts in chronological order and categorize them by kind (travel, meals, supplies, etc.) and give copies of any state and federal tax returns, employee records, and corporate and ownership documentation that may be requested. Having more data at your disposal and being more structured will make the task much less difficult.

Inquire about loan statements for your restaurant now. If you’ve taken out a loan to expand your restaurant this year, you should tell your tax preparer about it so that you may deduct the associated interest and fees. Your accountant will appreciate you sending them a copy of your most recent account statement from the financing business. In the long run, this can help you save quite a bit of cash.

You must choose a tax filing method. Various approaches may prove fruitful for various individuals. Consider whether you would rather use tax preparation software, file your taxes manually, or employ a tax preparer or certified public accountant. Although any of these approaches will work, you should feel comfortable with the one you ultimately pick. However, establishments with a sizable team or an expansive business model may consider hiring a certified public accountant or tax preparer.

Complete the Appropriate Forms: Form completion is just as critical as filing method selection. Talk to your tax preparer or Certified public accountant such as Five Tax in Maryland if you have any questions.

Your business operations will dictate the tax forms you need to file. For those who run a limited liability company (LLC), Form 1020 is required. Schedule C is for those who manage their own businesses as sole proprietors. Form 4070 is used for reporting employee tips when filing taxes. Avoid any uncertainty by doing your homework in advance.

You should always maintain your tax records for at least 7 years after you’ve filed your taxes, just in case an audit comes up during that time. Having all the essential documentation on hand will help you avoid a lot of trouble.

Read more: How To Reduce Accounting Overhead For Your Restaurant

What are Repercussions of Not Filing Tax for Restaurant?

These are some of the consequences you can face if you fail to file your restaurant taxes:

1. Failure to pay taxes can result in legal action against your business and personal assets, such as property.
2. Wage and bank account garnishments, as well as property seizures, are all possible outcomes of an IRS levy.
3. When you owe money to the Internal Revenue Service (IRS), they may register a lien against your property, which can have a negative effect on your credit score by as much as 100 points.
4. Failure to pay taxes may prevent financial organizations from extending loans or providing new lines of credit.
5. Late or missed tax payments can result in additional penalty charges and interest being added to the total amount payable.

How to Take Advantage of Tax Breaks for Restaurant Owners?

When running a restaurant, every penny counts due to the industry’s low profit margins. Therefore, you should minimize your taxable income by taking advantage of all possible deductions come Tax Time. If you own a restaurant, you should make a note of these tax breaks.

Advertising

We understand that marketing may be expensive, and that it can be difficult to get your restaurant’s name heard above the chaos of the competition in the food sector. It’s important to investigate every avenue while planning your tax-deductible advertising strategy. You should include the costs of advertising on social media, search engines, and review sites like Yelp, Google, and Facebook in your totals.

Traditional forms of advertising are still relevant. Advertising on television, radio, and in print publications may eat a sizable hole in your budget. Take advantage of our free Restaurant Marketing Grader for an in-depth evaluation and advice on how to save costs in this area.

Employee Expenses

Employee expenditures are a major drain on restaurant revenues. There are a variety of positions in both the front and back of the house that are essential to the success of any restaurant. All of these wages, as well as the cost of employees’ meals in between shifts, are tax deductible for a restaurant owner. The above-mentioned payroll taxes must still be paid in full by the business owner.

Appliances

If you want to make the greatest meal in town, you need the best tools. The purchase and repair of kitchen appliances including ovens, fryers, stoves, and dishwashers are all expenses that can be deducted from your taxable income.

Food prices

Depending on the type of restaurant you run, your food expenditures might be anywhere from 28% to 40% of total sales. The total cost of these ingredients should be deducted from your desired food cost.

Cookware

You may deduct the cost of your cutlery if you have forks, knives, spoons, and even sporks. Make sure you factor in the price of dishwashing liquid as well when calculating these fees.

Legal Costs

The paperwork required to open a restaurant might be overwhelming. The expense of obtaining licenses and permits, registering a brand or business name, and getting professional legal advice is deductible by a restaurant owner.

Health coverage

Insurance premiums paid by restaurants are deductible expenses for their owners. This includes restaurant insurance, company insurance, employee insurance, and insurance for delivery trucks.

Data Items

To put it simply, a restaurant owner may write off pretty much anything that’s on a table when a client sits down. Customers can deduct the cost of any extras they request, such as menus, napkins, ketchup, appetizer plates, and so on.

Read more: Tips On Staying Compliant With Accounting Standards For Restaurants

Tips on Restaurant Tax

Here are some easy suggestions for minimizing your restaurant’s tax bill:

Expenses incurred while eating and drinking can be written off.

Since food and drink costs make up a significant portion of most restaurants’ operating budgets, this should be an easy decision. They are the foundation of the thing you’re selling.

But make sure you’re not missing any opportunities to write off expenses. Indirect expenditures, like labor, are also deductible, so you may deduct more than just the price of the raw materials you use to create your meals. Food and drink that is wasted, ruined, or otherwise rejected can be accounted for, as can the indirect costs of things like oil and condiments. Expenses should be deducted as they are incurred, not as the meal is eaten.

What is Safe Harbor for Restaurant?

The IRS lays forth a safe harbor way of accounting for taxpayers that own retail or food service businesses (“Safe Harbor”).

75% of qualified costs paid in a remodel are treated as an “ordinary and necessary” business expense, while the remaining 25% are capitalized and depreciated over time as costs for improvement to a qualified building. This may allow retail and restaurant businesses to deduct the cost of remodeling or “refreshing” their locations. However, the renovation or refresh has to be more extensive than just a coat of paint or a thorough cleaning. Both of those are already tax deductible.

Ensure that employee perks are deducted

You may deduct a wide variety of costs associated with running your business, not simply salary. You can deduct the price of every meal you serve to your staff and kitchen employees. As an employer, you can deduct costs associated with providing paid sick leave, vacation pay, and health (and other types of) insurance. Be cautious, please.

When you’re an owner drawing a salary, it’s not always easy to determine how much of your income you may deduct. When a restaurant pays its owner a portion of the money it makes, that money is not deductible by the Internal Revenue Service.

Mileage Tracking

Do you commute to work or do you use a car? I was wondering whether any of your workers need driving privileges to do their jobs. The extra attention required to keep track of this deduction’s progress is certainly worth it. Keep track of your miles while you make deliveries, attend catering events, or do errands.

If you want to make sure that everything is in order for your accountant, it’s best to keep track of your miles in a formal ledger or a smartphone app made specifically for the purpose.

Use the Tax Credit for Working and Reducing Debt

The Work Opportunity Tax Credit (WOTC) is a deduction that some business owners may not be aware they are eligible for, and it rewards companies for hiring people from specific groups who have traditionally encountered impediments to employment and discrimination in the workplace.

People recommended by vocational rehabilitation agencies, people living in Empowerment Zones, formerly incarcerated persons, unemployed veterans, people receiving public assistance (such as Food Stamps), and many more fall under this category. When filling out your federal tax return, you may be eligible for this simple credit for hiring additional workers.

Make a record of your philanthropic contributions

Donations made to organizations recognized by the Internal Revenue Service as exempt from federal income tax (with some restrictions) are fully deductible by their company owners.

However, not all donations are tax deductible, so be careful about what you list. Food costs can be deducted, but salaries and other overhead cannot. However, there are a few perks that may be deducted more easily at eateries.

To claim a tax break, use Section 179

A tax break that was only in effect until 2016 has been made permanent for small enterprises who invest in new pieces of equipment. Something different about this law’s Section 179? Deductions for major capital expenditures can now be made in a single year, as opposed to being spread out over a number of years as was previously the case. Small firms can receive a tax credit of up to $500,000 to invest toward the purchase of machinery, tools, and furnishings.

Tip no less than 8 percent

The IRS has calculated these figures as a ballpark figure for tipping in American restaurants. Tipping between 15 and 25 percent sounds common in 2018, but the IRS recommends rounding down to 8 percent if you aren’t keeping meticulous records of your earnings.

In cash situations, the company owner is obligated to withhold 8% of the employee’s sales from each paycheck, whereas reporting on credit card tips is considerably more precise through the POS system.

Additionally, you must submit Form 8027 before the deadline

Paper versions of IRS Form 8027, “Employer’s Annual Information Return of Tip Income and Allocated Tips,” are due by the end of February for all restaurant owners; those who file online have until March 31. Now is also a good time to remind your present personnel of their tax responsibilities in regards to the reporting of tips. To ensure a seamless filing, everyone concerned must give their gross revenues and account for every penny.

Read more: The Benefits Of Automating Accounting Processes In The Restaurant Industry

FAQs on Restaurant Tax

What about taxes on meals at restaurants?

Restaurant meals are subject to taxation. Restaurant owners pay taxes on food they buy and sell. The tax on food served to customers is called sales tax on service.

What taxes do restaurant owners pay?

Taxes on revenue, sales, employees, and the building itself are just some of the many expenses restaurant operators face.

What can a restaurant write off on taxes?

Restaurants have some special expenditures that they can deduct from their taxable revenue. Food prices, server and kitchen labor are all deducted.

Conclusion

No matter which political party is in power, restaurants and other small enterprises will always have to pay taxes. Income, payroll, sales, and tip taxes can be complicated, but you should now have the tools you need to successfully navigate this maze.

If you want to save money on your taxes this year, though, it’s important to consult with a professional such as Five.Tax, who specializes in tax filing in Maryland. To avoid overpaying taxes that aren’t necessary, it’s important to stay up-to-date on any new tax breaks that may have been provided by your government.