When it comes to restaurant taxes, it’s important for owners to stay up-to-date on the latest requirements. Having a system to organize all of your income, expenses, and documentation year-round will help you avoid last-minute scrambles that can result in costly mistakes, while helping you maximize the tax benefits available to restaurants.
In this article, we’ll share a variety of restaurant tax tips, regulations, and resources to keep in mind for tax season.
What types of taxes are restaurants responsible for?
Restaurant income tax
Every business, including restaurants, are subject to federal income taxes in the United States. These taxes are calculated based on a business’s net income — which is the total income minus expenses and other adjustments.
The amount of federal restaurant income tax you pay depends on your restaurant’s business structure. Here are four common business structures for restaurants and the tax filing implications for each:
Sole proprietorship: Sole proprietors operate unincorporated businesses where just one owner pays personal income tax on profits earned from the business. Sole proprietors must report business income and expenses on their personal tax return using a Schedule C form.
Partnership: Partnerships do not file restaurant income tax returns with the IRS — instead, they file an “information return” that reports the business’s income, deductions, and more. Similar to sole proprietors, partnership income tax reporting is then “passed through” to each partner, who includes their share of the restaurant’s income or loss on their personal tax return.
Corporation: Corporations are more closely regulated and must file a business tax return. If the corporation is a C corporation, the income is taxed both at the corporate and individual level. For S corporations, the income is passed on to the shareholders at the individual level.
LLC: An LLC has one or more owners who are referred to as “members.” Members have the flexibility to choose whether to be taxed as a partnership, corporation, or through personal tax return(s).
In addition to federal income taxes, restaurants located in certain jurisdictions may also be required to pay state and local income taxes. Depending on the restaurant’s facts or location, taxes based on gross receipts or net worth/capital may apply. You should consult with a local tax advisor in order to identify the taxes which may be applicable based on your particular facts and circumstances.
Be sure to check the IRS website and ask your accountant for the latest restaurant tax requirements and policies for each business structure.
Restaurant payroll taxes
Payroll taxes are taxes that employees and their employers must pay based on salaries, wages and tips earned. Every restaurant owner who’s hired employees must withhold payroll taxes from their wages.
Employers must generally withhold federal income taxes from their employees’ wages. To figure out how much tax to withhold, use the employee’s Form W-4 and the withholding tables within IRS Publication 15.
The Federal Insurance Contributions Act (FICA) requires a tax on employees’ wages as well as contributions from employers in order to fund the US’s Social Security and Medicare programs. For 2021, all employers must withhold 6.2% for Social Security and 1.45% for Medicare from employees’ gross wages. Restaurant owners are then required to match the withholdings and send the total amount to the IRS.
Restaurant owners are also responsible for the Federal Unemployment Tax Act (FUTA) — a payroll tax used to fund unemployment benefits. If you have employees, you are required to pay FUTA to the IRS, but you won’t withhold anything from your employee’s paychecks to do so. The standard FUTA tax rate is currently 6.0% on the first $7,000 of taxable wages per employee, which means that the maximum tax employers have to pay per employee per tax year is $420 — employers paying state unemployment tax contributions timely may be able to pay as little as $42 per employee.
Employers must also be aware of state/local payroll taxes applicable to their restaurant location, which could include state income tax withholding, state disability, state unemployment, locality withholding, etc.
Tax on restaurant tips
Employers in a tips-based business like a restaurant are required to report tip income and pay federal and state income taxes plus payroll taxes on employee tips. With that in mind, it’s important for restaurant owners to keep a daily record of tips and how they’re split up between staff members.
Employers should know the restaurant tax rules for reporting tips so you can keep your staff informed. You should also communicate to tipped staff that they must claim all of their tips as taxable income on their individual tax returns. That means employees must track their own tips received for the tax year — then report that amount to their employers, and include it on their own tax returns.
Restaurant sales tax
Sales tax is a tax on the sale of goods and services generally paid by the customer. For restaurants, that means collecting applicable sales tax on food and beverages sold (both dine-in and off-premise) as well as merchandise like t-shirts and coffee mugs. However, businesses should not generally charge sales tax on the sale of gift cards. State rules may vary, but usually, you charge sales tax on the items purchased using a gift card.
Sales tax rates differ across states and include both state-level and local-level taxes. California has the highest state-level sales tax rate, at 7.25%, which can go as high as 10.25% with local taxes. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no state-level sales tax. While 45 states have a sales tax, about 38 states collect both state and local sales tax, so be aware of your local sales tax rates.
As a business owner, you also need to know the deadlines for reporting and paying sales tax you’ve collected. Typically, restaurant owners pay sales taxes quarterly or monthly, depending on your sales volume. Additionally, some states will require that you remit sales tax to the state on a more frequent basis than when you file a return (such as prepayments).
Finally, note that some states tax food sales differently, depending on whether it’s eaten on- or off-premise, whether it’s served hot or cold, and whether it was purchased through a third-party platform like DoorDash. It’s important to stay up-to-date on how different types of food are taxed in different states and be aware of who is collecting the applicable sales tax on the sale of food and beverages.
Another restaurant tax that owners should be aware of is property taxes. If you own the real estate for your restaurant (instead of renting), you must pay property taxes, which are collected by your state or local government.
What tax deductions are available to restaurants?
Like all businesses, restaurants are able to deduct business expenses from their taxable income. Restaurant owners will report and categorize these expenses on form Schedule C.
Every business expense that you write off on your restaurant tax return must be documented. That means restaurant owners must keep detailed records of their expenses, including receipts and Schedule C category.
For restaurants, here are a list of common tax-deductible business expenses:
Employee wages and benefits: Money spent on labor, including salaries, bonuses, commissions, sick pay, vacation pay, health plans, and more.
Contract labor: Wages paid to independent contractors (non-employees).
Cost of goods sold (COGS): The cost of creating the food and beverage items on your menu, as well as money spent on storage, takeout containers, and merchandise.
Operating costs: The day-to-day costs of running your business, including rent, utilities, office supplies, menus, restaurant decor and linen services.
Marketing costs: Including signage, social media advertising, marketing software tools, website hosting fees, and more.
Vehicle use: The cost of cars or trucks used for business purposes, including maintenance, fuel, insurance, parking, mileage, and more.
Legal and professional services: Includes fees paid to your lawyer, accountant, financial adviser, or any other professional service.
Depreciation: The cost of fixed assets (e.g., kitchen equipment, furniture) or capital improvements that improve the value of your property (e.g., dining room renovations or upgrading HVAC system) over time.
Operating losses: If you had a loss from your business operations in previous years, you may carry back that net operating loss (NOL) to potentially get a refund.
And many more! Be sure to talk to your tax advisor to ensure you’re maximizing the restaurant tax deductions available to you.
Bottom line: Keep your restaurant taxes organized
Small business owners — particularly those with cash businesses like restaurants — can unfortunately be targeted by the IRS.
As a result, restaurant owners should take a proactive approach to restaurant taxes and create a strategy to stay organized year-round. Here are some tips for filing taxes when partnered with DoorDash, including when and how you will receive 1099-K forms, information on Marketplace Facilitator rules, and more.
Whether you’re tracking income, expenses, and deductions using online accounting tools, spreadsheets, or a file cabinet, choose a system that works for your business (and that you know you’ll stick to throughout the year). Additionally, talking to a tax professional to stay informed on the latest tax requirements for restaurant owners will help you avoid errors, reduce stress, and ensure accuracy on your restaurant tax return.
Disclaimer: This content is for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You're responsible for your own compliance with laws and regulations. Contact your attorney or other relevant advisor for advice specific to your circumstances.