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.
If you, like most restaurant owners, allow payment cards in your restaurant, then you’re subject to credit and debit card processing fees. There are two main pricing plans on the market for these fees: bundle pricing or interchange plus pricing.
With bundle pricing, you agree with your processor to pay a blanket fee (2.5 percent, for example) on every transaction. In addition to this, the processor may charge additional nominal fees, such as a statement fee or an interchange fee.
The interchange plus pricing strategy, on the other hand, looks at each individual transaction and charges the precise interchange fee, plus an agreed upon mark-up. With this strategy, debit cards incur different fees than credit cards. For example, a Visa debit card charges 1.19 percent in interchange fees, whereas a Visa credit card charges 1.54 percent.
These fees can amount to huge expenses each year, Bernicker says. In fact, for an average restaurant that has debit card sales of $400,000 a year, the total interchange can cost more than $5,100.
Certain states—including Arizona, Delaware, Hawaii, Illinois, Michigan, Mississippi, New Mexico, Ohio, Pennsylvania, and Washington, among others—have begun imposing gross receipt taxes to make up for the continually decreasing income tax revenues state governments are receiving each year. This tax, as opposed to an income tax, applies to the total gross revenue of a company instead of the net income.
“In other words, the state isn’t looking at what the bottom line is,” Polakow says. “They’re looking at what the top is.” A gross receipts tax doesn’t consider whether the business has gained any profit from a transaction; instead, it taxes every transaction, whether the business incurs a profit or loss.
If you think revenue from gift-card purchases is excluded from taxation, think again. Gift-card revenue is just like any other source of revenue that goes into a business’ income tax calculation, and when gift cards remain unclaimed, they can be a liability for restaurant owners.
“They don’t necessarily just become the property of the restaurant owner,” Roberts says. “They do need to generally be turned over to the state.”
This unspoken-for property falls under the category of “escheat laws,” which means funds from unclaimed property—like gift cards and even paychecks that an employee never picks up—must be
remitted to the state. “It’s a quantified tax,” Roberts says, “but it’s … basically saying that’s not money you get to keep.”
If you want to set the mood for your diners with music—whether it be easy listening or energetic pop tunes—you’re going to have to pay for it. Federal copyright laws, which have been in place since 1909, say that people or businesses—restaurants included—cannot use a copyrighted song without the songwriter’s permission.
“You may own a CD because you bought it, but you don’t own the song on it,” Candilora says. This means that to play any songs, CDs, or soundtracks in your stores, or even to use them in TV ads, you must pay a fee to obtain permission.
That’s where the American Society of Composers, Authors and Publishers (ASCAP) comes in. It allows businesses to pay an annual fee for access to a massive database of songs. The minimum fee is less than $1 a day, but fees can go up depending on the kind of performance (live or soundtrack) and the audience size.
“You get to use over 8.5 million songs,” Candilora says. “You get to use them as much as you want or as little as you want, and you still pay this one simple flat fee.”
Some credit and debit card processors require their merchants to pay this fee related to data security for credit and debit card information. The fees make sure “that software and POS systems are compliant with the latest data-security standards,” Bernicker says, so that a customer’s information is protected. “What you’re seeing is a fee being passed through or charged to the merchant for compliance with PCI standards.”
Along the same lines, noncompliance with PCI standards can result in heavy fines for a business. Banks can be charged anywhere from $5,000 to $100,000 for noncompliance, and this fine is often passed down to the merchant.
Tax Incentives to Take Advantage of Now
Make sure you’re not missing out on tax incentives that can save you money and put extra cash in your pockets.
Hiring Incentives to Restore Employment (HIRE) Act: Enacted in 2010, this act allows businesses to lower their payroll taxes by hiring previously unemployed workers. In addition, for each “qualified employee” who works at least 52 consecutive weeks, employers are eligible for a tax credit—known as the “new hire retention credit”—up to $1,000.
In order to qualify for the credit, the employee must have been out of work for 60 days before being hired, and the employee must be hired between February 3, 2010, and January 1, 2011. For more information, visit www.irs.gov.
Work Opportunity Tax Credit (WOTC): This offers a 40 percent credit up to the first $6,000 in wages for employees who have a harder time finding jobs. Amended in 2009, the WOTC lists 12 groups—from veterans and Hurricane Katrina victims to ex-felons and disconnected youths—that employers can target for employment.
Employers have the ability to choose who to hire and can hire as many employees who qualify for the credit as they desire. The tax credit can be as much as $2,400 for each new adult hire, $1,200 for each summer youth hire, $4,800 for each disabled veteran, and $9,000 for each long-term TANF recipient (Temporary Assistance for Needy Families) hired over a two-year period. Check out www.doleta.gov for more information.
Health Care Tax Credit: This credit offers small businesses a way to afford health care coverage for their employees. Small businesses with fewer than 25 full-time employees (or 50 part-time employees and any combination thereof) and average wages of less than $50,000 can receive a 35 percent tax credit on the health insurance they provide their employees.
To qualify, the employer must cover at least 50 percent of the cost of health care coverage for at least some of its workers. To find out more, go to www.irs.gov.
1603 American Recovery and Reinvestment Tax Act (ARRTA) Program: If your restaurant is planning any major green projects, you should check out this program, administered by the Department of Treasury and the Department of Energy. It offers renewable energy project developers cash payments equivalent to 30 percent of the project’s total cost.
As of February 25, 2011, the program has funded more than 7,100 projects and given businesses more than $6.4 billion for their sustainable efforts. Go to www.treasury.gov for further information.
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