Restaurant Taxes: Sales tax, Federal Tax and Payroll taxes on Food Biz

Accounting

Running restaurant business is fun. Serving tasty recipe to customers and seeing happy faces are awesome. However, you need to face complex tasks such as taxes along the way.

As restaurant business owner, I am not asking you to be tax pro. However, You should have basic understanding of each restaurant taxes. You can save the taxes and avoid the huge penalty. Your accountant might be impressed with your knowledge. Who knows?

I am sure you are familiar with restaurant tax names. Federal tax, sales tax, payroll tax etc. In this article, we understand the applicability of each tax and rate of tax. Please note that this is not tax advice and always contact your accountant for tax issues.

Taxes on Restaurant – Food & Beverages Business:

Following taxes are applicable while running a restaurant business.

Income tax on restaurant business:

Applicability of income tax is directly linked with your restaurant business structure. Tax treatment is different for incorporated and non incorporated business.

Tax rate for non incorporated business:

Sole properietory, LLC and partnership are considered as pass-through entities. The income is passed through to owners or members. Member has directly consider business income share in his tax return and pay the taxes as per tax slab applicable to individual.

The tax rate applicable is as per individual tax slab for assessed year. We recommend considered IRS updates to know the tax slab applicable to you.

Moreover, each entity mentioned above has to pay self employment tax. Self employment tax includes Medicare and social security tax.

IRS requires you to pay your taxes in advance per quarter. You need to estimate the annual tax and make quarterly tax payments.

Below is the tax slab for individual for the year 2020. Please note that tax slab will be different for married individuals filling jointly. We suggest visit IRS website to know tax rate applicable to you.

Tax rate on corporation:

Corporate tax is applicable when you setup your restaurant business in the form of S corp or C corp.

S corp is treated as pass through entities. However, setting up C Corp requires tax compliance twice. On Corporation level and on individual level.

You have to pay corporate tax on net profit of C corp. Currently C corp tax rate is 21% for the year 2020.You should show dividend you receive from C corp in your tax return and pay tax on it.

Federal income tax is charged on profit generated from the restaurant business. You can claim tax deductions and reduce the tax liability.

Tax Deductions for restaurant business:

Having business has several tax perks. You can deduct business expenses and reduce your tax liability to almost half.

Don’t forget to claim following expense while doing taxes:

Employee pay: Restaurant cant function without quality staff. For the purpose of taxes, wages are treated equally for full time, part time or casual employees.

You can deduct employee pay and benefits from your taxable income and save good amount of taxes. You should have maintained payroll records properly to avail the benefit.

Inventory:

Food cost takes around 30% to 40% on sales. You can claim deductions for ingredience used preparing meal. You can get the cost number from your inventory management system. Please note that all food purchase is not qualified for deduction. You can only deduct cost of goods sold. This can arrive by Adding opening inventory value to purchases and then deducting closing inventory value. ( Cost of goods sold = Purchases Add Opening stock Less closing stock).

Travelling:

All business travels are allowed as tax deductions. Don’t forget to save the travel bills as audit trail. You can save the records on cloud storage such as dropbox or drive. Popular cloud accountng software offers receipt scanning and storage features. This feature makes your life much easier.

Marketing:

No business can thrive without proper marketing. Luckily you can use multiple marketing channel such as PPC, food marketplace, social to grow the restaurant business.

You may have in house marketer team or contract with marekting agency. All marketing expenses give you tax deduction benefits.

Professional fees:

As restaurant business owners, you have to comply multiple taxes and law rules. It ranges from local taxes to licenses.

The professional team plays a huge role in timely compliance. You can deduct professional fees for services such as accounting, legal advice, local tax compliance, insurance advice.

Insurance:

Insurance helps you to keep going in tough situations. Moreover, it helps you to save taxes. You might be paying different types of insurance such as workers insurance, vehicle insurance, fire insurance, general liability insurance. Don’t forget to claim the premium paid in your tax return.

Rent/ Lease:

Rent of cafe is a major expense for restaurant or cafe. That’s why there is the trend of the food truck restaurant business. No matter you are paying rent for an office or restaurant. It is tax-deductible.

Read our post on small business tax deductions to know more.

Sales tax on restaurant business :

What is sales tax and How to calculate sales tax?

Sales tax is charged on sales of food or beverages or any other taxable item. Sales tax is more complicated than income tax.

Many business owners feel worried about sales tax compliance. It is assumed that it is the extra cost to business. However, this is the wrong concept of sales tax.

You are not paying sales tax from your pocket. You are just collecting sales tax from customers and paying the same to government.

Sales tax calculation is easy. You just need to multiply sales tax rate with sales amount. If you are using accounting software, the software calculates the tax automatically. You just need to setup correct sales tax rate in the accounting software.

Example: You have $12500 restaurant revenue in the month. You have collected $1062.5 sales tax at 8.5% sales tax rate. ( $12500*8.5%). Next month, you need to deposit $1062.5 to government.

Restaurant sales tax by State:

USA has different sales tax rates for different state sales tax. Sales tax rate would range from 4% to 10% and it depends on where you are located.

Refer below file to know the sales tax rate on restaurant business. Please note that the rate is exclusive of local taxes. Please open image in new tab to view the large sized image.

Popular accounting software such as xero / Quickbooks recommend sales tax rate automatically as per location of business. Once the correct sales tax rate is setup, the accounting software automatically calculates the tax amount and tax liability.

Alternatively, you can check sales tax applicability as per location using Avalara website.

You just need to enter the address and the applicable sales tax rate would be generated.

You may also check your state government website to know accurate rate of sales tax on food business.

Sales tax compliance and filling :

Sales tax compliance includes tax collection, tax payment and sales tax filling. Sales tax due dates vary state wise.

You may require to pay sales tax every following month. Sales tax filling is required on monthly, quarterly or annual basis. Please check state government website to know the applicable due date of payment and return filling.

Local taxes on restaurant business :

You need to pay local taxes along with sales tax. Local taxes are levied on restaurant sales. You should collect and remit the local tax to government.

Local tax rate varies city wise. It ranges from 1% to 4%. Consult your local authority to know the local tax rate.

Restaurant tax state wise:

Restaurant tax Chicago:

Chicago restaurant tax rate is 9.25%. It includes 6.25% sales tax, 1.75% country tax and 1.25% city tax. Read more at Chicago gov web

Restaurant tax New York City ( NYC):

NYC has 4% sales tax rate. Top of it, restaurant has to collect and pay local taxes. NYC has 4.5% city tax and 0.375% metropolitan commuter transportation district surcharge. Total tax on NYC sales is 8.875%.

Source: New york gov web

Restaurant tax California:

California has different rate of sales tax. It depends on location of business. The rate is between 7.25% to 10.50%.

Visit California gov web to know the sales tax rate applicable to your restaurant.

Restaurant tax Virginia:

General sales tax rate in Virginia is 5.3% to 7%. The rate is different city wise.

Sales of food for home consumption is taxed at reduced rate of 2.5%. The definition of food for home consumption includes most staple grocery food items and cold prepared foods packaged for home consumption.

However, most of the restaurant does not qualify this reduction. In this case, normal rate applicable to city should be charged on restaurant sales.

Source: Virginia gov web

Massachusetts restaurant tax:

Massachusetts charges 6.25% tax on restaurant or part of the store. Restaurant definition includes any eating or drinking establishment – whether stationary or mobile, temporary or permanent-that is primarily engaged in the business of selling meals.

Restaurant tax should be charged on food as well as alcohol. Caterer, theaters, food truck, diners coffee shops, salad bars, cafe, vending machines are liable to charge restaurant tax and show it separately on the invoice.

Source: Massachusetts Gov Web

DC Restaurant tax :

DC charges 8% to 10.25% sales tax. It is one of the high sales tax charging state in USA. Sales tax rate is different as per item of sales.

Soft drink is charged at the rate of 8%. Soft drink includes coffee, tea, cocoa.
Any meal, liquor or soft drink consumed on restaurant is charged at 10% tax rate.
Alcoholic beverages sold off premises are charged at 10.25% sales tax rate.

Know more at DC Gov Web

Restaurant tax Florida:

Florida restaurant tax rate is 6%. If you are selling in Florida, you need to collect and pay sales tax to gov. If you buy the taxable item and don’t pay sales tax, you need to pay use tax.

You need to file sales tax return periodically. Your filling period depends on your sales tax collection amount.

Know more about Florida restaurant tax compliance on gov website.

Restaurant tax Illinois:

Illinois Restaurant tax is 6.25%. Packed food not consumable immediately is qualified for reduced rate of 1%. Restaurant is liable to charge local tax along with 6.25% sales tax. Local tax rate falls between 0.50% to 2.00%.

Know more about Illinois restaurant tax at below sites:

Tax rate finder

Illinois gov web

Restaurant tax Utah:

Utah has different tax rate city wise. The restaurant tax rate is between 6.10% to 9.05%. Visit Utah gov web to know the accurate rate.

Restaurant tax NJ ( New Jersey):

New Jersey restaurant tax rate is 6.625%. It is effective from 2018. The previous rate was 6.875%.

New jersey charges uniform sales tax rate on all services and goods. The sales tax is levied on digital goods and properties.

Source: New jersey Gov web.

Payroll taxes on restaurant :

Payroll taxes are taxes levied on employee’s pay. You need to deduct taxes from gross pay. It is called withholding taxes. Top of it, You should contribution additional amount as state, federal and local tax. It is called employer taxes.

Payroll taxes cover multiple taxes. It includes social security taxes, medicare tax, unemployment tax. On top of it, you need to take care of federal withholding tax, state tax withholding and retirement fund contributions.

FICA Taxes:

FICA taxes cover two types of taxes. Social security and medicare taxes. Social security tax rate is 6.2% and medicare tax rate is 1.45%.

Employer should deduct FICA tax withholding from employee’s wages. Additionally, He should contribute the 7.65% of pay as employer’s contribution.

Income tax withholding:

Employer should deduct income tax in advance from the pay. It is called income tax withholding. Two types of withholding is required. Federal income tax withholding and state income tax withholding. The rate varies as per location of business.

Unemployment tax:

Some states requires employer to contribute to unemployment tax. The rate is different for each state. You need to pay unemployment tax as per cent of wages.

Remittance of tax and Payroll reports:

You are required to pay payroll tax on monthly or quarterly basis. You should file tax payroll reports on due date. Government levies huge penalty of 15% if you do not comply to payroll rules.

Read our post on payroll tax to get full understanding of payroll compliance.

Wrap up:

I hope you are now aware of the restaurant taxes. There are multiple rules and deadlines involve in restaurant tax compliance.

You need to collect sales tax. You need to deduct payroll withholding. You need to remit the taxes.

You dig more and follow all tax procedures. This requires time and efforts. I am sure you remain busy in growing your business. If managing time is issue for you, you can hire local staff to get some help.

Alternatively, You can outsource outsource restaurant accounting and payroll function altogether. This will be time saver and cost effective solution. If you need any help, you can contact us and we will reply in few hours.

How do you handle restaurant taxes? Are you facing any issues? Let me know with comments.