A Restaurant Owners Guide To Tax Obligations

Just as with running any type of business, having a good understanding of your tax obligations as a restaurant owner is more than just beneficial; it’s essential. 

Whether it’s payroll taxes for employees, or sales taxes on meals, knowing which taxes are applicable to you and your restaurant business, can help you better manage them and avoid the risk of penalties. 

While engaging with professional tax planning in Miami is usually enough to ensure that you’re tax-compliant all-year round, it still makes sense to have at least a basic understanding of your tax obligations, and to help you with this, here is a brief guide:

Sales tax

In the majority of states, sales tax on meals and beverages must be collected by restaurants:

• Sales tax rate – ranging from between 5 and 10%, check with a local tax professional to determine the correct rate of sales tax for your restaurant.
• Taxable items – most food and drinks are subject to sales tax
• Reporting and payment – it’s your responsibility to collect and remit sales tax from customers, to your local tax authority. This can be done on a monthly or quarterly basis.

Payroll taxes

Federal, state and local taxes (in some instances) for payroll must be withheld and paid by you, the employer:

• Federal payroll – these taxes include Medicare and Social Security, both of which are matched by employers. Federal income tax must also be withheld by you from the wages of your employees. 
• State payroll – income tax withholding may also be required in some states.
• Unemployment – federal and state unemployment taxes, or FUTA and SUTA, must also be paid.

Tips and service charges

All tips must be reported and taxed accurately:

• Employee tips – if they exceed $20 in a month, employee tips must be reported to the employer, upon which you will need to withhold taxes.
• Employer responsibility – Social Security, Medicare and income taxes must be withheld by employers, while they are also responsible for paying the employer’s share of these taxes.
• Service charges – considered as wages and not tips, service charges must be included in the taxable income of your employees. 

Income taxes

How your restaurant is structured determines the way in which your income is taxed:

• Sole proprietorship or partnership – taxes are paid based on your individual rate, while profits and losses are passed through to your personal return.
• LLC or S-Corp – profits are passed through to the business owners, and reported on their personal returns. S-Corps, however, might present more opportunities to save on taxes.
• C-Corp – corporate income taxes are paid on a C-Corp restaurant as it’s classed as a separate entity. There is the potential for double taxation, so consult with a tax advisor before choosing this structure. 

Property taxes

Based on the value of your restaurant, property taxes must be paid if the land or building in which it operates, is owned by you. 

Excise taxes

Alcohol and prepared food taxes might mean that you’re subject to excise taxes as well as regular sales tax. Check with a tax expert in your state for detailed and up-to-date guidance on this. 

Tax deductions

Some tax deductions common to restaurants include:

• Cost of Goods Sold (COGS) – ingredient and supply costs for preparing food and beverages can be deducted 
• Business expenses – maintenance, utilities and rent (among others) are all deductible
• Employee wages and benefits – employee wages and benefits such as health insurance are deductible
• Depreciation – furniture or equipment investment depreciations can be deducted over time
• Meals and entertainment – entertainment expenses and business-related meals can be deducted by up to 50%

Tax credits

Below are some tax credits restaurant owners may be eligible for:

• Work Opportunity Tax Credit (WOTC) – by hiring those who are long-term unemployed or veterans, you may be eligible for this tax credit
• FICA Tip Credit – for your share of Medicare and Social Security taxes paid on employee tips, you can claim a tax credit

Filing deadlines

Generally, sales tax returns must be filed monthly or quarterly depending on your state. Payroll tax reports must be filed quarterly for federal payroll taxes, and annually for FUTA. Lastly, income taxes must be paid annually. 

It’s important to remember that proper record-keeping, accounting and bookkeeping in Coral Gables can go a long way to ensuring that as a restaurant owner, you always pay the right amount of taxes, and that you are compliant with necessary tax laws, at all times; guesswork is simply too risky. So if you haven’t yet invested in professional help to guide you through your taxes all year round as a restaurant owner, there’s no time quite like the present.