Restaurant Sales Tax

In recent years, more and more restaurants have instituted service charges. If you look closely at your restaurant bill, you may see a “service charge” or some other charge added to your bill. While the practice is not without detractors, this blog will sidestep the controversy and discuss the potential income tax, employment tax, and restaurant sales tax implications of service charges.  

The first tax implication of a service charges for restaurants is income tax. The Internal Revenue Code taxes “all income from whatever source derived.”  Service charges certainly fall within this broad definition of gross income and a restaurant would have to include service charge revenues in its gross receipts. A restaurant can take deductions for wages, rent, and other business expenses against this income.

Restaurants have a potential employment tax issue when it comes to service charges. Service charges appear as a line item on a restaurant check just like tips. It is easy for a patron to confuse a service charge for a gratuity or tip. Unlike tips, a service charge will generally not be considered wages upon which a restaurant would have to pay employment tax.

However, this may vary on a case-by-case basis and can depend on what the restaurant does with the service charge revenues and the arrangements it has with its employees. For example, a restaurant that distributes service charge revenues to its servers will probably have to pay employment tax on the service charges. A restaurant that does not distribute the service charge revenues may not need to pay employment tax on the service charges.

Finally, service charges raise sales tax issues. A restaurant will generally need to collect and pay sales taxes on service charges. For example, a restaurant that charges a diner $100 for a dinner and a $5 service charge will have to pay sales tax on a $105 sale.

Many restaurants have resorted to service charges to help them through challenging times. Service charges can have potential tax implications if they are not property reported on tax returns. At RJS LAW, we help businesses with IRS, EDD Employment Tax, and CDTFA Sales Tax Audits. We can be reached at 619-595-1655 for a free consultation for any tax issue your business is experiencing.

Written by Joseph Cole, Esq., LL.M.