Operating a restaurant is challenging. Along with managing employees, vendors, and customers, you also have the hectic experience of tax season. However, correctly filing taxes is essential for your business. Mistakes come with penalties, while being prepared takes care of taxes, saves money, and keeps your restaurant operating safely and securely.
Here's a straightforward overview of the restaurant tax process.
What I need to know about restaurant taxes
Restaurants have more tax requirements than nearly any other small business. In addition to federal and state income tax, restaurant operators will also be liable for the following:
- Sales tax on food, beverage, and possibly delivery fees
- Payroll tax for both tipped and non-tipped employees
- Excise tax for alcohol in some jurisdictions
- Property tax for buildings and equipment
Because there are so many layers and levels of tax in the restaurant industry, keeping accurate records is the foundation of paying taxes without stress.
How to report and pay income and expenses
Restaurants handle both cash and credit cards each day. Every sale, whether taking place in the restaurant, a delivery, or a catered event needs to have the income tracked. On the expense side, good records of the following expenses will be useful:
- Food and beverage cost
- Equipment and maintenance
- Rental, utilities, and property insurance
- Wages, benefits, payroll taxes
Good records will make tax preparation simple, but will also help maximize your deductions.
Typical Deductions for Restaurants
Restaurants have many potential deductions to reduce taxable income:
- Cost of goods sold: Food and beverage inventory that was used to prepare meals.
- Labor costs: Wages for employees, tips reported by employees, payroll taxes.
- Equipment/depreciation: Ovens, refrigerators, and furniture.
- Operating expenses: Rent, utilities, insurance premiums, etc.
All of these potential deductions can add up quickly, if you have proper documentation.
Payroll and Reporting Tips
Payroll is one of the most complex areas of consideration for restaurants. Employees who earn tips must report their tips, and the employer must withhold payroll taxes. Additionally, a restaurant can claim the FICA tip credit, which is a dollar-for-dollar offset against its Social Security and Medicare tax owed on tips.
If a restaurant does not have a reliable payroll system in place, it could get very expensive by creating compliance issues and increased penalties.
Do-it-yourself versus professional help?
Restaurant owners are certainly able to file their taxes by themselves with the use of software, but due to the complexity of the industry, most will seek to hire some sort of professional help. You use the following methods for filing tax returns:
- CPAs: Probably a better fit for larger restaurants, or those with multiple locations.
- Bookkeeping firms that frequently structure their practices on hospitality: They make sense for small and mid-sized restaurant owners.
- Accounting software: Accounting firms like QuickBooks and Xero do a great job of simplifying tax preparation if the restaurant owner is diligent and organized.
Be Tax-Ready Year-Round
It's easier to file taxes when you stay on top of everything all year long. Some best practices for staying tax-ready:
- Reconcile sales weekly
- Save receipts and invoices in a digital format
- Put money aside to pay your quarterly taxes
Being proactive can help ease any stress before the taxes are due and saves you from mistakes.
Final Thoughts
Taxes can feel like a burden to managers and owners alike; however, filing taxes on a restaurant is part of running a successful restaurant. Once you have a reliable system for keeping records, understand tax deductions, and provide appropriate payroll reporting, you'll find tax time much easier. Whether you are using software or outside professionals, being prepared is essential.
By staying organized, your ability to remain compliant opens up the ability for restaurants to protect their profits, thus allowing owners to focus on creating excellent food and providing memorable experiences for all customers.
