Restaurants, like any other business, are required to pay certain taxes on their property, payroll and all sources of income. This is a crucial responsibility, and in most cases it is a good idea to hire a competent accountant to help you stay on top of your tax obligations. An overview of the most common restaurants taxes are elaborated below.
Property taxes are levied by the city in which the restaurant or food service operation is located. People who are leasing usually take on the cost of the property taxes as well.
Although they differ by state, payroll taxes are all made up of contributions to social security (FICA) and Medicare. Usually, a percentage of the employees' incomes, matched by the employer, goes toward these ends. There is generally no difference in how taxes are calculated for full-time or part-time hourly employees. Restaurants are responsible for collecting taxes in the same fashion for an hourly employee who works 10 hours a week as well as the hourly employee who works 40 hours a week.
Restaurant worker tips are subject to taxation. This includes cash tips and tips charged on a credit card. Hence, it is crucial that employees report their tips to their employers, and employers report the monthly tip income on Form 4070 to the IRS every tenth day of every month after the tips are received. » Learn More
Restaurants are required to collect sales tax on all food and beverages sold, as well as on retail items. This is true even in locations where no sales tax is charged on goods sold in grocery stores or elsewhere. Sales taxes are remitted to the state on a monthly basis. Some restaurants calculate tax into the menu item prices, while others add it at the register or on the check. An easy way to keep track of sales tax is by using a Point of Sale (POS) system, which can track and remit sales tax. However, consulting an accountant will help since rules differ by location.
Another aspect of restaurants taxes is good recordkeeping. The IRS recommends keeping all records of employment taxes for four years in case of an audit. These records should include the following information:
- Your employer identification number, or EIN
- Information on all employees and past employees
- Amounts and dates of all wage payments
- Tip reports from all workers
- Reports of allocated tips, if any
- Copies of W-4 Forms or other documents showing income tax withholdings
The IRS may perform an audit on a restaurant or company who shows suspicious income information or fails to withhold the proper amount of taxes from employees. Although uncommon, some restaurant owners may actually try to deceive the IRS by committing tax fraud. The IRS keeps track of the most common ways restaurant owners attempt deception. Be sure to avoid the following mistakes when it comes to reporting taxes:
- Hiding income
- Failure to pay employment taxes
- Claiming false deductions
- Overstating deductions
- Deliberate under-reporting
The consequences for committing tax fraud are far worse than simply doing things correctly the first time. Again, an experienced accountant can be a huge asset when it comes to correctly calculating taxes.
Be sure to take the responsibility of reporting taxes seriously. Reporting taxes is a vital component of any business operation, but especially in a restaurant where tipping and sales tax need to be calculated on top of property and payroll. Be sure to spend the time needed to calculate taxes the right way, or hire a professional to do it for you.