Restaurant taxes—fun stuff.
But trust me, it’s not as dry as you think.
I’ve watched too many restaurant owners get blindsided by tax bills they didn’t see coming, or worse, leave thousands of dollars on the table because they didn’t understand what they owed or when they owed it.
When you’re operating on 3-5% profit margins, every dollar of tax you overpay or every penalty you incur for missing a deadline can be the difference between a profitable quarter and scrambling to make payroll.
Restaurant tax isn’t like filing taxes for a retail store or a consulting business.
- You’re dealing with tip reporting requirements that don’t exist in other industries.
- You’re managing sales tax on dine-in versus takeout orders.
- You’re juggling payroll taxes for employees with different wage structures—some making minimum wage plus tips, others on a salary.
And depending on how your business is structured, you could be paying taxes at completely different rates than the restaurant down the street.
We’re going to break down restaurant business income taxes, payroll taxes for restaurants, sales tax for restaurants, and tax on tips, so you know what you pay and when you need to pay it.
Key Takeaways
- Your business structure determines your tax rate: Sole proprietors pay income tax plus 15.3% self-employment tax, while S-corps can save thousands by splitting income between salary and distributions. C-corps face double taxation at 21% corporate rate plus personal tax on dividends.
- Payroll taxes extend beyond wages: Employers pay 7.65% FICA on all wages and tips, plus federal and state unemployment taxes. The FICA Tip Credit can recover thousands annually on tips exceeding minimum wage—but most generalist accountants never claim it.
- Sales tax rules vary dramatically by location: Most states tax dine-in and takeout the same, but states like Ohio exempt takeout while California’s 80/80 rule can make all sales taxable for quick-service restaurants. Your POS must handle these distinctions correctly.
- Tip reporting creates significant compliance obligations: Employees must report tips over $20/month by the 10th of the following month. You’re responsible for withholding and paying FICA taxes on all reported tips—even though customers paid them directly to staff.
- Missing tax deadlines costs more than the tax itself: Late filing penalties run 5% per month (up to 25%), while late payment penalties are 0.5% monthly plus interest. Quarterly estimated payments, monthly payroll deposits, and annual filings require constant attention to avoid expensive penalties.
Restaurant Business Income Taxes— What You Pay Depends on Your Structure
The first thing you need to understand about restaurant business income taxes: what you pay depends entirely on how your business is legally structured.
A sole proprietor running a single-location café pays taxes completely differently than an LLC operating a multi-unit concept, and both of those scenarios look nothing like how a C-corporation handles tax obligations.
Sole Proprietors and Partnerships
If you’re structured this way, your business doesn’t pay separate income tax. Instead, all business income “passes through” to your personal tax return.
For 2025, individual federal income tax rates range from 10% to 37%, depending on your taxable income and filing status. That means if your restaurant generates $150,000 in net profit and you’re a single filer, you’re looking at paying taxes at the 24% bracket on a portion of that income.
The challenge here? You’re also paying self-employment tax—which covers Social Security and Medicare—on top of your income tax. This is where restaurant owners often get caught off guard. They plan for income tax but forget about the additional 15.3% self-employment tax hit.
And you need to make quarterly estimated tax payments if you expect to owe $1,000 or more in taxes. Miss a payment, and you’re looking at underpayment penalties on top of what you already owe.
C-Corporations
Now let’s talk about C-corporations. If you’ve incorporated your restaurant as a C-corp, you’re dealing with a completely different tax structure. C-corporations pay a flat 21% federal corporate income tax rate on all taxable income, which was established by the Tax Cuts and Jobs Act of 2017 and remains in effect for 2025.
There is a catch. C-corps face double taxation. The corporation pays 21% on its profits, and then when you take those profits out as dividends to yourself as an owner, you pay personal income tax on those dividends again. This is why many restaurant owners, especially those running smaller operations, don’t choose C-corp status unless they have specific strategic reasons.
S-Corporations
S-corporations offer a middle ground that many multi-unit restaurant operators find attractive. With an S-corp, you get the liability protection of a corporation, but income passes through to your personal return like a partnership—no double taxation.
The key advantage is that you can pay yourself a reasonable salary (subject to payroll taxes) and take additional profits as distributions (not subject to self-employment tax).
For a restaurant throwing off $200,000 in annual profit, this structure can save tens of thousands in self-employment taxes.
But the IRS watches this closely. Pay yourself too low a salary to avoid payroll taxes, and you’re inviting an audit.
LLCs
A limited liability company can choose how it wants to be taxed—as a sole proprietorship, partnership, S-corp, or C-corp.
Most restaurant LLCs elect S-corp status once they hit a certain profit threshold because of those self-employment tax savings I just mentioned. The flexibility is valuable, but it also means you need to actively choose the right tax treatment for your situation rather than just defaulting to whatever structure you initially filed.
It’s important for owners to remember that restaurant income tax rates can reach as high as the 37% range depending on business structure, and in an industry where margins are thin, the structure you choose isn’t just a legal formality—it’s a financial strategy. The wrong structure can cost you thousands in unnecessary taxes every year. The right structure can keep more money in your business where it belongs.
And changing your tax structure isn’t something you do on a whim. Converting from a sole proprietorship to an S-corp, for example, requires filing paperwork with the IRS and your state, and the change doesn’t take effect immediately. This is why working with a restaurant-specialized accounting firm makes a material difference.
Payroll Taxes for Restaurants
Payroll taxes for restaurants aren’t just expensive—they’re complicated in ways that catch even experienced restaurant operators off guard.
Between FICA, federal unemployment taxes, state unemployment taxes, and the nuances of tip reporting, the cost of having employees goes well beyond their hourly wages or salaries.
FICA
Let’s start with FICA—the Federal Insurance Contributions Act tax that funds Social Security and Medicare. For 2025, the FICA tax rate is 7.65% of employee wages:
- 6.2% for Social Security
- 1.45% for Medicare
So, on every dollar of wages you pay, you’re actually spending an additional $7.65 cents in FICA taxes.
But it gets more complicated. The Social Security portion only applies to the first $176,100 of wages in 2025, which means once an employee hits that threshold, you stop paying Social Security tax on their wages—but you keep paying Medicare tax.
For most restaurant employees, this cap doesn’t matter because they’re not earning anywhere near six figures. But if you have high-earning managers or executives, this is a detail you need to track.
FUTA
Then there’s FUTA—the Federal Unemployment Tax Act. The standard FUTA tax rate is 6% on the first $7,000 of each employee’s wages.
If you pay your state unemployment taxes on time, you get a credit of up to 5.4%, which brings your effective FUTA rate down to just 0.6%. That means you’re paying a maximum of $42 per employee per year. That’s manageable for most restaurants.
But there’s a catch. California and New York are currently “credit reduction states” because they have outstanding federal unemployment loans, which raises the effective FUTA rate to 1.5%—or $105 per employee for 2025.
Here’s where restaurants face a unique challenge: turnover. The restaurant industry is notorious for high employee turnover, and every time you hire someone new, you’re paying unemployment taxes on their wages.
And then there are state unemployment taxes, which vary wildly by state and by your company’s experience rating. If you’ve laid off a lot of employees who then claimed unemployment benefits, your state unemployment tax rate goes up. For restaurants that had to furlough staff during COVID or those that deal with seasonal fluctuations, this can mean significantly higher unemployment tax costs.
Sales Tax for Restaurants
Sales tax for restaurants is one of those areas where what seems simple on the surface turns into a compliance nightmare when you dig into the actual rules.
The challenge isn’t just that every state has different sales tax rates. It’s that the rules for what’s taxable, when it’s taxable, and at what rate change based on whether your customer is eating in your dining room, taking food to go, or having it delivered.
Unique State Rules
Let’s start with the basics. Most states tax prepared food, whether it’s dine-in or takeout at the same rate. Texas, New York, Florida, Colorado—if you’re selling restaurant food, you’re collecting sales tax regardless of where the customer eats it.
But then you have states like Ohio, where takeout food is sales tax exempt but the same meal eaten in the restaurant is subject to sales tax.
For restaurant operators, this means your POS system needs to be sophisticated enough to differentiate between dine-in and takeout orders and apply different tax rates accordingly.
California takes this complexity to another level with something called the “80/80 rule.” If more than 80% of your total sales are food sales, and more than 80% of those food sales are taxable, then you must collect tax on 100% of sales—including cold food sold to-go.
This hits quick-service restaurants particularly hard. You might think that cold sandwich you’re selling to-go isn’t taxable, but if you meet the 80/80 threshold, it is. Restaurants that don’t understand this rule often under-collect sales tax for years, then get hit with a massive assessment during an audit.
Exceptions To The Rule
Another challenge is that there’s always an exception.
Some jurisdictions exempt certain items from sales tax—like groceries—but prepared foods are almost always taxable. Alcohol often has additional beverage taxes on top of regular sales tax. Some states have meal taxes that only apply to restaurant food. Mandatory service charges are typically subject to sales tax, while voluntary tips are not. Your POS system needs to handle all of this correctly, or you’re either overcharging customers (which hurts your competitiveness) or under-collecting (which exposes you to audit liability).
For restaurant operators, the key takeaway is this: sales tax compliance isn’t something you can just “figure out” on your own. The rules are too nuanced, they change too frequently, and the penalties for getting it wrong are too severe.
Tax on Tips
Tips aren’t optional income—they’re wages as far as the IRS is concerned, and restaurant owners have significant tax obligations around them. This is where restaurants face compliance requirements that simply don’t exist in most other industries, and getting it wrong can trigger audits and penalties.
The Basics
Employees must report cash tips to you if they total $20 or more per month. Tips below that threshold don’t need to be reported to the employer, but employees still owe taxes on them when they file their personal returns. Employees must report tips by the 10th of the month following the month the tips were received. So tips earned in October need to be reported by November 10th.
Once employees report those tips to you, you’re responsible for withholding federal income tax, Social Security tax, and Medicare tax on those tips, and you must also pay the employer portion of FICA taxes. We already covered that employer FICA is 7.65%—but now you’re paying that 7.65% not just on wages you’re paying out, but on tips that customers are paying directly to your employees.
This is a huge cost that catches restaurant owners off guard. If your servers are reporting $50,000 in tips annually, you’re paying an additional $3,825 in employer-side FICA taxes on money you never even touched. For a full-service restaurant with significant tip income, this can add up to tens of thousands of dollars per year in additional payroll taxes.
FICA Tip Credit
But here’s where specialized restaurant accounting knowledge pays off: the FICA Tip Credit. The FICA Tip Credit allows you to claim a tax credit for the employer portion of Social Security and Medicare taxes you paid on tips that exceed the federal minimum wage of $7.25 per hour. This credit is calculated on Form 8846, which you attach to your annual tax return.
Here’s how it works in practice.
Let’s say a server works 150 hours in a month, earns $600 in direct wages from you (which is $4.00/hour), and reports $900 in tips. The federal minimum wage calculation for 150 hours is $1,087.50 (150 hours × $7.25). Since the server only received $600 in wages from you, you’d need $487.50 in tips just to reach minimum wage.
That means $412.50 of the reported tips are “creditable tips” above minimum wage.
You multiply those creditable tips by 7.65% to determine your FICA Tip Credit—in this case, about $31.56 for that employee for that month.
Scale that across 20 servers over 12 months, and you’re looking at several thousand dollars in tax credits annually. But many restaurant accountants don’t claim this credit, which means restaurants are leaving tens of thousands of dollars on the table every year. This is exactly why working with accountants who specialize in restaurants matters—they know about credits like this and ensure you’re claiming every dollar you’re entitled to.
Allocated Tips
There’s another complication: allocated tips. If you operate a large food or beverage establishment (defined as a restaurant with more than 10 employees on a typical business day), and your employees report total tips of less than 8% of gross receipts, you must allocate additional tip income to employees to reach that 8% threshold.
This doesn’t mean employees owe more tax immediately—it’s just reported on their W-2—but it does trigger IRS scrutiny. If the IRS believes tips are being underreported, you’re looking at potential audits and back-tax assessments.
The compliance burden is significant. You need to maintain records of all reported tips, withhold the correct amount of taxes, pay your employer share, file quarterly reports, and ensure everything is properly documented on W-2s at year-end. One missing tip report or miscalculated withholding, and you’re dealing with IRS penalties.
Restaurant Tax Deadlines
Missing tax deadlines isn’t just inconvenient—it’s expensive. The IRS charges penalties and interest on late payments, and for restaurants operating on razor-thin margins, a single missed deadline can create cash flow problems that cascade for months.
Quarterly Payments
Let’s talk about quarterly estimated tax payments first, because these are the deadlines that cause the most pain for restaurant owners.
If you’re structured as a sole proprietor, partnership, or S-corp, you need to make estimated tax payments on
- April 15
- June 16
- September 15
- January 15 2026.
Notice these aren’t actually quarterly—the periods are uneven, which trips people up. And if you miss a payment, you’re looking at underpayment penalties even if you eventually pay all the tax you owe.
For restaurants with seasonal revenue—beach towns, ski resorts, college towns—this quarterly structure is brutal. You might have huge revenue in Q2 and Q3, then minimal revenue in Q1 and Q4. But the IRS still expects roughly equal payments each quarter unless you use the annualized installment method, which adds complexity most restaurant owners don’t want to deal with.
Payroll Tax Deadlines
Payroll tax deadlines are even more frequent and more critical to track. Most restaurants are on a semi-weekly or monthly deposit schedule for federal payroll taxes, depending on your total tax liability. If your FUTA tax liability exceeds $500 in a quarter, you must deposit it by the last day of the month following the end of the quarter. Miss a payroll tax deposit, and you’re looking at penalties that range from 2% to 15% depending on how late you are.
Annual Restaurant Tax Deadlines
Then there are the annual deadlines that every restaurant owner needs to have marked on their calendar:
January 31: This is a huge deadline. Form W-2s for all employees must be filed with the Social Security Administration by January 31, and copies must be provided to employees. If you have independent contractors who you paid $600 or more, Form 1099-NEC is also due January 31 . Miss this deadline, and you’re facing late-filing penalties.
March 15: If you’re an S-corporation or partnership, your business tax return (Form 1120-S or Form 1065) is due March 15. You can file for an extension, but that doesn’t extend the time to pay—if you owe taxes, you still need to pay by March 15 to avoid penalties and interest.
April 15: If you’re a sole proprietor, C-corporation, or filing personal returns, April 15 is your deadline. This is also the first quarterly estimated payment deadline for the current year. For restaurants, this often means you’re simultaneously closing out last year’s taxes and making your first payment for the current year—double the cash outlay at once.
Sales Tax Deadline
Sales tax filing deadlines vary by state, but most restaurants file monthly or quarterly. High-volume restaurants in some states are required to file monthly, which means you’re dealing with sales tax compliance 12 times per year on top of everything else. Each state has different due dates, different forms, and different penalties for late filing. For multi-unit operators in multiple states, this becomes a full-time compliance job.
What Happens If You Miss a Tax Deadline?
Late payment penalties are typically 0.5% per month, plus interest. Late filing penalties are even worse—5% per month, up to 25% of the tax owed.
For a restaurant that owes $50,000 in taxes, a three-month delay in filing means $7,500 in penalties plus interest. That’s money that could have gone toward equipment, marketing, or employee wages.
The other thing that catches restaurant owners: estimated payments need to cover at least 90% of your current year’s tax liability or 100% of your prior year’s liability (110% if your adjusted gross income exceeded $150,000). Underpay by too much, and you’re facing underpayment penalties even if you eventually make it up.
For restaurant owners, the solution isn’t just marking these deadlines on a calendar—it’s having restaurant-focused tax professionals who track these deadlines for you, ensure payments are made on time, and handle all the filing requirements. The cost of missing even one deadline is typically far more than the cost of having professionals manage your tax compliance throughout the year.
Build a Stronger Restaurant Tax Strategy
Restaurant tax isn’t straightforward, it’s not one-size-fits-all, and getting it wrong costs you money—both in overpayments and in penalties.
Whether it’s choosing the right business structure to minimize your restaurant business income taxes, understanding your obligations for payroll taxes for restaurants, navigating the complexities of sales tax for restaurants, or properly handling tax on tips, every aspect of restaurant tax requires specialized knowledge that most generalist accountants simply don’t have.
The difference between working with a generalist and working with a restaurant-specialized CPA isn’t just convenience—it’s measurable in dollars.
- It shows up in tax credits claimed that a generalist would never find.
- It appears in strategic business structure advice that saves you thousands annually.
- It materializes in proper tip tax compliance that prevents IRS audits.
- And it compounds over years of proactive tax planning rather than reactive tax filing.
The Restaurant CPAs exists specifically to connect restaurant owners with accounting firms that specialize in the restaurant industry. Whether you’re a single-location café or a multi-unit restaurant group, we can match you with accounting professionals who speak your language and know how to optimize your tax strategy.
Apply for your custom CPA matches today and see what proper restaurant tax planning can do for your bottom line.
