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Accountant's Corner
Take Advantage of Tip Credit
By Ronald L. Noll, MS, CPA

Ron Noll If you employ tipped employees, you are entitled to a credit against income taxes. The credit is figured using FICA taxes paid on reported tips and wages that exceed the minimum wage requirement. For example, if you pay your wait staff $2.13 per hour, figure an additional $2.12 per hour of tips to bring the wage up to the standard minimum wage ($4.25). All additional tips are then eligible for the tip credit of 7.65%.

Beware, however, that the tip credit amount is added to profits, thus increasing your income tax liability. Credit the IRS and Congress for this bad idea.

The IRS is still conducting lots of tip audits. Be sure to complete Form 8027 correctly (due Feb. 28th). The form is designed to determine the percentage of tips on credit card sales compared to the tips on other sales. You are expected to report cash tips within 2% of the charged tips. More audits are generated because of improperly completed forms than all other causes. It has been reported that up to 75% of the restaurants covered by tip reporting rules don't file their 8027 Report. Be one of those who report!

Not all restauranteurs are required to file the 8027 report. You are required to file the 8027 with the IRS if you serve food and beverages for on-premises consumption; if tipping is customary in your establishment and you employ 10 or more full-time employees on a typical business day. A separate 8027 must be filed for each food or beverage establishment that meets these criteria.

A business is required to keep employee tip information for 4 years after the due date of the company tax return. Tipped employees are required to keep daily records of tips received. These records must include names and addresses, company name, tips received, tips shared with others and names of those individuals.

The Philadelphia District IRS is participating in a national tip study agreement. This is a program designed to pressure restaurant owners and at least 75% of their tipped employees to sign an agreement requiring 100% tip reporting. The local and national restaurant associations are violently opposed to this program because it holds restaurant owners for their employees' honesty. The National Restaurant Association is working very hard to change this. If the IRS does audit and finds tips under reported, the owner is liable for matching FICA accumulated during the past three years.

IRS Targets Restaurants
The IRS is targeting cash businesses for audits. Restaurants are on the hit list. When the IRS audits a restaurant, the owners seem to be the ones under scrutiny. I have seen more audits investigating owners' personal bank accounts than business accounts. You are expected to explain the source of every deposit to your personal bank account, even though it is a business audit. The IRS is particularly keen on investigating currency deposits into your personal account.

The IRS is very strict concerning skimming cash. For example, if you deduct a vacation as a business expense, the IRS will simply recalculate your taxes, add a penalty and interest and usually forget it. On the other hand if you under-report sales, the IRS will consider criminal charges. Furthermore, if you have under reported more than $10,000 in each of the last three years, the IRS will try to send you to jail.

I know of a restaurant owner charged criminally for skimming and spent $45,000 in legal fees - about double the taxes he saved, not to mention the three years of worry and stress he endured. Obviously, there are better ways of making money than cheating the IRS.

If you are audited, get professional help A competent accountant, CPA or enrolled agent will make your audit much easier. Hiring an attorney usually makes the auditor suspicious. The auditor usually wants a face-to-face meeting with the taxpayer. Your accountant should help you prepare for questions likely to be asked. Never volunteer information. Answer all questions directly, but as brief as possible.

Personal Property/Real Estate Reports Due April 15.
Personal property and real estate tax bills have been mailed. You should have also received a form from your county that requests a listing of property used in your business as of January 1, 1995. Send these reports back by April 15. They are the basis for the bills you receive next year.

It pays to review your asset listing. Make note of old equipment thrown away, sold or otherwise disposed. Don't pay property taxes on assets you no longer own. Also, don't list vehicles, buildings, inventory or improvements to the building which can't be removed. The county depreciates the cost before calculating your tax, so indicate the purchase date when filing forms.

IRS Releases Mileage and Per Diem Rates for 1996
The IRS has released the mileage and per diem rate for 1996. The 1996 standard business mileage rate increased from $.29 to $.30. Per diem rate for lodging is $116, meals and incidentals per diem rate is $36 and lodging meals and incidentals is $152.


Ronald L. Noll, MS, CPA, is President of Noll & Company, Inc., a Certified Public Accounting firm in Malvern specializing in restaurant accounting. If you have suggestions, questions or comments, please send them to Noll & Company, Inc., Certified Public Accountants, 18 E. Lancaster Avenue, Malvern, PA 19355, or call us at (610) 644-3750.




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