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Tax season may be over, but that doesn’t mean it’s time to put taxes and fees out of your head altogether. Since you can’t run a business without them, it’s better to arm yourself with knowledge and know exactly what you’re dealing with. Here, QSR breaks down the 10 most common taxes and fees that quick serves should keep an eye on.
Income taxes are levied upon every business in every industry and vary based on the structure of the entity. Essentially, restaurants can choose to set themselves up in two ways: as a C corporation or as an S corporation, also known as a pass-through entity. A C corporation is what Polakow calls a “regular corporation”; many major companies, and some smaller companies, are classified as C corporations and are taxed at two levels—the corporate level and the shareholder level.
In a pass-through entity structure, the individual who owns the company pays the tax, and all profits and losses pass through to the owners. Polakow says most quick serves classify themselves as pass-through entities to avoid double taxation.
Income taxes are based on your restaurant’s net income, and tax levels are based on graduated rates: 15 percent for companies that make less than $50,000 a year, 25 percent for $50,000–$100,000, 34 percent for $100,000–$10 million, and 35 percent for all earnings exceeding $10 million.
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State law requires restaurants to collect a sales tax on all food, beverage, and other items (like T-shirts or coffee mugs) sold in the store. This money, once collected, goes to the state. Sales tax rates differ from state to state, and they “can vary by city, too, because the cities can also have their own sales tax applicable to various jurisdictions,” Roberts says.
Taxes could fall anywhere between the 5–10 percent mark, and Roberts says this disparity in rates can have a big effect on a restaurant’s business.
For instance, if your franchise location has a higher sales tax than a location in an adjacent city, some customers will choose to dine at the cheaper of the two alternatives. In addition, sales tax audits can be extremely tricky to defend. Selig says the typical audit goes back three years, “so it is essential that you maintain good records and keep accurate receipts. It’s also a good idea to document every day your restaurant is closed, as this may be an effective way to refute a tax examiner’s inflated estimates.”
If your business is located on a piece of property—be it a free-standing location or one inside of a strip mall—you must pay property taxes. This tax is levied by the city or county the restaurant is located in and can differ from city to city and state to state.
The good news, Roberts says, is that your property taxes should be decreasing these days.
“Obviously, the market has deflated property values, so companies definitely should be paying less,” she says. “And if they’re not, they need to look at those assessments and make sure that their property tax numbers are going down.”
Even if you lease your building, Roberts says, you should still look through your leasing agreement to ensure your property tax is taking the market value into account.
“Like any other law-abiding business, restaurateurs are required to withhold, match, and remit payroll taxes,” Selig says. “A portion of this money funds Social Security, Medicare, and the Federal Unemployment tax, and the remainder pays for the administration expenses that are incurred by the government.”
With payroll taxes, a percentage of the employee’s earnings are withheld—rates are the same for full-time and part-time employees—and matched by the employer; this money then passes on to the state and federal governments. There are several components to the payroll tax, but the two main categories are the Social Security/Medicare tax and the Unemployment tax.
Social Security/Medicare Taxes: These two taxes, which fall under the Federal Insurance Contributions Act (FICA), make up a sizeable portion of the payroll tax. Social Security taxes 6.2 percent and Medicare taxes 1.45 percent, each of which applies to both the employee and the employer.
For 2011, however, the employee’s Social Security tax rate fell to 4.2 percent on earnings up to $106,800, although the rate remains the same for employers. These two taxes, which are mandated by the federal government, help fund the national Old-Age, Survivors, and Disability Insurance (OASDI) and the Hospital Insurance (HI) programs.
Unemployment Tax: This tax, which is mandated by both the federal and state government and can differ at each level, aids individuals who have lost their jobs.
“Generally what happens is the state unemployment comes first, and they take a percentage of your wage base and that goes into the state government,” Roberts says. “The federal government usually takes a percentage based on what’s left that didn’t go to states, and that’s how unemployment compensation gets paid.”
Until July 1, the federal Unemployment Tax rate sat at 6.2 percent; at that point, the rate dropped to 6 percent.