When the new year rolls around, that means tax season is coming. The Internal Revenue Service (IRS) announced that Jan. 23 is the first day you can file taxes in 2023. It can feel like a burden to file taxes for yourself, but business owners also have to file for the company.
What should restaurant owners know about tax compliance? What should you keep in mind to ensure you abide by the law? This guide will tell you what you need to know.
What Are Payroll Taxes?
The first thing a restaurant owner should know about tax compliance is payroll tax. It encompasses the taxes you and your employees pay for wages, salaries and tips. A payroll tax enforces code from the federal, state and local governments, so everyone contributes to public goods like Social Security and Medicare. Those services fall under the Federal Insurance Contributions Act (FICA).
The employer and its employees must pay an equal share of these FICA obligations. Typically, a paycheck will withhold a portion of the money and give it to the appropriate governments. You’re responsible for paying for Medicare and Social Security as the restaurant owner. You’ll also need to pay unemployment tax. This cost contributes to the federal and state unemployment systems, so people receive compensation after losing their jobs.
How Do Restaurants Report Tips?
Many restaurant employees, especially the waitstaff, rely on tips to make a living. Tips can add to considerable compensation, but the IRS still requires you to report them. Restaurant owners must file Form 8027, which you may know as Employer’s Annual Information Return of Tip Income and Allocated Tips.
This form is necessary if you have more than 10 employees working a typical day. Failure to comply with taxes and tip forms could result in an audit.
Can Restaurants Avoid Audits?
For any business, audits are among the most dreaded things you’ll encounter as an owner. A government official comes in and wants to see your books. Unfortunately, you can’t hand over your Harry Potter collection. Audits can be random, so there’s not much you can do about them. But other times, the IRS will audit you if they think suspicious activities are happening.
Audits can be random, but there are ways you can lower the odds of one happening at your restaurant. First, you must file on time to show that you’re complying. You’ll also need to ensure all the math adds up on your filings. Use a tax professional for help if you aren’t confident with your calculations. Other ways to avoid an audit include reporting your income, picking the correct deductions and correctly classifying your workers.
What Happens If Restaurants Don’t Comply?
There’s a reason Benjamin Franklin said nothing is certain except for death and taxes. No matter what type of restaurant you have, you must pay taxes each year. If you don’t pay the correct amount or anything, you’re likely to face severe penalties from the IRS. The federal and state governments could come at you with criminal prosecution if you don’t pay taxes. There are also penalties and other consequences if you fail an IRS audit.
Criminal charges are only the tip of the iceberg. Restaurant owners could face enforcement methods like the government seizing assets to compensate for the taxes not paid. New York can suspend your driver’s license if your unpaid tax bill exceeds $10,000. A large debt (exceeding $50,000) can lead to the IRS suspending your passport or refusing to issue one if you request it.
Can Restaurants Get Tax Deductions?
Taxes can feel like a hassle for restaurant owners. But the good news is there are ways you can reduce your tax burden. These three deductions are among the credits you should be looking for, especially if you’re a beginner in the restaurant industry.
1. Business Expenses
The first deduction you should look for is operating expenses. Restaurant owners can deduct much of their costs as long as they’re necessary for the operations. For example, you can write off your expenses for kitchen supplies. The cost of food, especially nowadays, can get very high. You can write off food like raw ingredients, frying oil, canned goods and more.
Some expenses are easy to forget, but you’ll be glad you wrote them off. The IRS allows you to write off advertising expenses as they fall under operating costs. You can deduct the cost of paid advertisements on the radio, TV and in newspapers. But don’t forget about T-shirts, mugs, business cards and digital advertising expenses like SEO services.
2. Qualified Business Income Deduction
If you own a restaurant not part of a corporation, you may qualify for the qualified business income (QBI) deduction. This credit lets you take 20% off your restaurant’s annual net income, which accounts for capital gains, losses, dividends and payments to shareholders.
The QBI started on Jan. 1, 2018, resulting from the Tax Cuts and Jobs Act of 2017. Restaurant owners can take advantage of it now. But this credit expires on Dec. 31, 2025, unless Congress takes action to extend the credit.
3. Operating Losses
Restaurants are one of the most challenging businesses to make a profit. There are some years when you see a spike in income, but it gets difficult at other times. If your restaurant finds operating losses in a year, you can deduct them from your taxes.
Making Uncle Sam Happy
Restaurant owners have a lot to deal with daily. The job can be stressful, but it’s worth the time and effort when you see customers enjoying quality food and drinks. One way to reduce stress is by complying with taxes every year. Follow this guide and use a tax professional to ensure Uncle Sam stays happy.
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