In the United States, a restaurant can operate under various ownership structures, each with tax implications.
In this article, we’ll:
- Summarize the six common business models available to restaurant owners.
- List restaurant sales tax by state and city
- Explain the different types of taxes and which business model they apply to.
- Share how you can minimize your tax liability.
Six restaurant business models
Any business owner operating in the restaurant industry can set up under any of the following ownership structures:
- Sole proprietorship: The restaurant is owned and operated by an individual. The owner is personally liable for all debts and liabilities of the restaurant.
- Partnership: Involves two or more people who own and operate the restaurant together. Partnerships can be general or limited and involve shared responsibility for the operation of the business and its debts.
- Limited liability company (LLC): An LLC is the perfect combination of elements from partnerships and corporations. It provides the owners with limited liability protection, protecting their personal assets from the business’s debts and liabilities. This is a popular choice for small to medium-sized restaurants.
- Corporation: This is a more complex business structure where the restaurant is a separate legal entity from its owners. They provide strong liability protection for owners.
- S corporation: A special type of corporation that avoids double taxation by allowing profits and losses to be passed through directly to the owner’s personal tax returns, similar to a partnership or LLC.
- Cooperative: In this model, the restaurant is owned and operated by a group of individuals for their mutual benefit — members of the cooperative share in the profits and decision-making of the restaurant.
Restaurant sales tax by state and city
Restaurant food taxes typically comprise the state’s Sales and Use Tax along with any additional sales tax imposed by the city or county. Below, we outline some of the most prevalent state and city taxes applicable to restaurants.
|NYC restaurant tax
|With its renowned dining scene, NYC’s restaurant tax stands at 8.875%, including the city’s 4.5% service tax, New York State’s collect sales tax of 4%, and a 0.375% tax from the Metropolitan Commuter Transportation District.
|California restaurant tax
|The California restaurant tax rate fluctuates based on the county of operation and typically ranges from 7.25% to 10.25%.
|Washington, DC restaurant tax
|The restaurant tax in DC ranks among the highest nationwide, with establishments facing a 10% charge for meals and liquor consumption.
|Chicago restaurant tax
|Starting from January 1st, 2020, the restaurant tax in Chicago is 0.5%. Coupled with the state’s 6.25% tax on food, the county’s 1.25% tax, and the city’s tax of 1.25%, the total tax faced by restaurants in Chicago amounts to 9.25%.
|Texas restaurant tax
|In Texas, the restaurant tax reaches a maximum of 8.25%. This includes the state tax of 6.25%, with the possibility of an additional 2% depending on the county where the restaurant is situated.
|Florida restaurant tax
|In Florida, the restaurant tax rate is fixed at 6%, with additional taxes determined by the county.
|Virginia restaurant tax
|Starting from January 1st, 2020, Virginia imposes an average tax rate of 5% on prepared foods. While a 2.5% tax applies to food in general, restaurants in specific counties and cities can charge up to 6.5% additionally based on their location.
|New Jersey restaurant tax
|Tax in New Jersey stands at 6.625%, aligning with the state’s Sales of Services tax rate that has been effective since 2018
|Seattle restaurant tax
|Seattle restaurant tax totals 10.1%, comprising Washington State’s Sales and Use tax at 6.5% and Seattle’s city tax at 3.6%.
|Massachusetts restaurant tax
|In Massachusetts, the tax on meals sold by restaurants stands at 6.25%, applying uniformly across all cities and counties, including Boston. This tax must be collected from the purchaser and separately itemized on the bill
|Utah restaurant tax
|Tax in Utah varies depending on the county of operation, ranging from 6.10% to 10.05%.
Here are a handful of frequently inquired about state and city restaurant tax rates. For further details on your area’s specific restaurant tax rate, please consult your state’s Department of Revenue or Department of Treasury website.
Sole proprietorship and partnerships
A sole proprietorship is the simplest form of business structure and has a relatively straightforward tax setup.
Any income earned through restaurant owners is reported on the personal income tax return using IRS Schedule C, which details the profits and losses of the business. This means restaurant income is taxed at the owner’s individual tax rate.
You’re also responsible for paying self-employment taxes, which is 15.3%, to cover the following:
- Social Security: 12.4%
- Medicare: 2.9%
This tax is calculated on the business’s net earnings and is reported on Schedule SE.
There’s also the consideration of quarterly estimated taxes. Since income isn’t withheld from your business earnings as it would be for an employee, sole proprietors typically need to make estimated tax payments to the IRS each quarter to cover their income tax and self-employment tax obligations.
Similarly, in partnerships, the profits and losses are filtered to each owner, who completes the income and self-employment tax based on their share of the income, which is determined through a Schedule K-1 form.
The only additional consideration for partnerships is the partnership return, which details the partnership’s income, deductions, gains, losses, and other financial activities.
LLC and corporations
The tax implications for a restaurant registered as an LLC vary depending on how the particular LLC type is taxed. An LLC is a flexible business structure that allows for various tax classifications.
Joe Troyer, the visionary founder behind Review Grower, home to a potent local citation finder, emphasizes that understanding the tax implications of different LLC classifications is crucial for ensuring optimal financial management within the restaurant industry.
Here are the common tax considerations for restaurants registered as LLCs:
Single-member LLC (disregarded entity for tax purposes)
The standard tax classification for a one-person LLC is as a “disregarded entity.” This means the income and expenses “pass-through” to the owner’s personal tax return, and the LLC doesn’t pay taxes — similar to a sole proprietor.
The owner is responsible for paying self-employment net income taxes, covering both the employer and employee parts of Social Security and Medicare taxes. This applies to any type of LLC, including corporations.
Multi-member LLC (taxed as a partnership)
A multi-member LLC is typically taxed as a partnership. The profits and losses pass through to individual members’ tax returns.
Each member receives a K-1 form outlining their share of the LLC’s profits and losses. Members report this information on their personal tax returns and are subject to self-employment tax on their share of the LLC’s income.
LLC electing corporate taxation
An LLC can elect to be taxed as a C-corporation. In this case, the corporation itself pays taxes on its profits.
The challenge with C-corporation taxation is the potential for double taxation. Corporate profits are taxed at the corporate level, and if dividends are distributed to shareholders, those dividends are taxed on the individual level.
LLC electing s-corporation taxation
S-corporation taxation allows the LLC to avoid corporate-level taxation.
The LLC’s income and losses pass through to shareholders, who report this on their personal tax returns. Shareholders who work for the company may receive a reasonable salary subject to payroll taxes.
The cooperative structure differs slightly from a corporation as decisions are made democratically among its members rather than on a board of directors.
Tax works in a similar way:
- Profits passed to members need to be reported on each member’s individual tax returns.
- Members may need to pay self-employment taxes depending on the nature of their work.
- Corporate tax is applicable to any income generated unrelated to its members.
- Like any other business, cooperatives are responsible for employment taxes.
Tax implications for all restaurants
Regardless of the ownership structure, all restaurants must pay the following taxes:
- Sales taxes: On the sale of food and beverages.
- Property taxes: If a restaurant owns its property, it’ll be subject to property taxes, which are based on the value of the property and land. Local governments (like states) impose this tax.
- Excise taxes: If the restaurant sells certain items like alcoholic beverages, it may be subject to federal and/or state excise taxes.
How to reduce your restaurant tax liability
It’s safe to say any business owner wants to reduce the restaurant taxes it pays. A tax professional can help you find legal tax advantages depending on your state and local laws.
However, the crux of limiting tax liabilities is meticulously recording all business expenses so they can be deducted from the tax you owe. Here are some to keep in mind.
Marketing and advertising expenses
Did you know that restaurants can deduct a spectrum of marketing costs?
Spanning from advertisements in local media, online marketing via social platforms, and even essential tools like an affordable social media scheduler, photo editing platform, or content management tool can help reduce your tax liability.
Additionally, expenses incurred for professional services, such as hiring a social media virtual assistant or content writer, are also eligible for a deduction.
These simple tax deductions enhance your restaurant’s marketing efforts and play a pivotal role in optimizing your overall tax strategy.
Utilizing recruiting software for hiring purposes can also be considered a deductible expense, providing additional value to your business operations. Expenses incurred for professional services, such as hiring a social media manager or content writer, are also eligible for a deduction.
These simple restaurant tax deductions enhance your marketing efforts and play a pivotal role in optimizing your overall tax strategy.
Interest on mortgage loans
Interest payments on mortgage loans (and other types of loans) are generally tax-deductible.
This aspect underscores the importance of comprehensive financial planning, ensuring that every element, from ingredient purchases to property mortgages, is considered when managing a restaurant’s finances.
Why? You don’t want to miss out on the few areas where you can reduce your tax payments.
Sometimes, companies (mostly corporations) that pay their members/shareholders a dividend can treat such payments as a business expense to lower their tax payments.
Establishing a foreign trust
As a restaurant owner, don’t underestimate the tax benefits of a foreign trust.
By establishing a foreign trust, you can reduce your tax liability and take advantage of favorable tax rates in certain jurisdictions. It can provide significant savings, especially if your restaurant has international operations or foreign investments.
Additionally, a foreign trust offers asset protection benefits, providing you with a layer of financial security. Assets held in a foreign trust are generally shielded from creditors and lawsuits, safeguarding your restaurant’s assets and preserving its financial stability.
In short, anything used for business purposes can be deducted from your tax:
- Cost of goods sold: This includes the cost of food ingredients and beverages sold to customers.
- Labor costs and benefits: Salaries, wages, bonuses, and benefits (like health insurance) provided to employees are deductible.
- Rent or lease payments: Payments for leasing or renting the space for the restaurant.
- Utilities: Costs for electricity, gas, water, and other utilities necessary for running the restaurant.
- Equipment depreciation: On things like kitchen appliances, furniture, and computers.
- Repairs and maintenance: Costs for maintaining and repairing equipment, furniture, and the restaurant premises.
- Insurance: Premiums are paid for various types of insurance, such as property insurance, liability insurance, and worker’s compensation insurance.
- Supplies: Non-food supplies such as cleaning materials, dishware, utensils, and linens.
- Professional fees: Fees paid for legal, accounting, and consulting services.
- Licenses and permits: Costs for obtaining necessary licenses and permits to operate the restaurant.
- Credit card processing fees: Fees charged by banks or credit card companies for processing customer payments.
- Travel and meeting expenses: Costs related to business travel or meetings, including transportation, lodging, and meals.
- Training costs: Expenses for training staff, including costs for workshops or courses.
- Health inspection fees: Fees paid for required health inspections.
- Charitable contributions: Donations made by the restaurant to qualified charitable organizations.
- Technology expenses: Costs for software or technology services used in the restaurant’s operation.
- Utilities and office supplies: General office expenses, including phone bills, internet service, and office supplies like paper and ink.
- The type of tax you pay depends on your restaurant’s ownership structure.
- Knowing your tax liabilities is important to avoid paying the wrong amount, missing deadlines, and incurring fines.
- The best way to reduce the tax you pay is to thoroughly record all business expenses, as these can be deducted from your tax costs.
- A tax professional can help you find other legal tax advantages, like setting up a foreign trust.
Frequently Asked Questions (FAQ)
Tax implications vary based on the type of restaurant business. For instance, sole proprietorships and partnerships report business income on personal tax returns, while corporations are taxed separately.
The location of a restaurant significantly impacts its tax obligations. Local, state, and federal taxes can vary, including sales tax rates and additional restaurant taxes like tourism or alcohol. It’s crucial for restaurant owners to understand and comply with the specific tax regulations of their location.
Yes, restaurants may qualify for specific tax deductions and credits. Common deductions include expenses for marketing, employee wages, and kitchen equipment. Some may also qualify for credits like the Work Opportunity Tax Credit. Consult with a tax professional for tailored advice.