Restaurant tax guide: How to maximize savings and manage tip reporting (2026)

As a restaurant owner, you already know the work never really stops—service in the front, operations in the back, and paperwork after hours. That paperwork can mean anything from organizing sales orders to running payroll to calculating and filing taxes. The upside? With the right accounting software and systems, you can streamline many of your everyday tasks so you can concentrate on other business priorities.

This 2026 guide walks through the tax essentials for restaurant owners, highlights updated rules on tips and overtime, and explains how to maximize deductions while staying compliant. We’ll also cover how bookkeeping software can simplify recordkeeping and relieve some tax season stress. Let’s dig in.

Jump to:

• Tax changes affecting restaurants for the 2026 filing year
• Key tax forms for small restaurants
• Top tax deductions for restaurant owners
• Bonus deductions many restaurant owners overlook
• Common mistakes small restaurant owners make with taxes
• Keep Your Focus on the Kitchen, Not the Paperwork

Tax changes affecting restaurants for the 2026 filing year 

As of July 4, 2025, two new temporary federal deductions affect workers’ tips and overtime through 2028. These changes apply to federal income taxes only; state and local tax rules may differ. Restaurant owners should review payroll procedures and employee tip tracking to ensure compliance and maximize savings.

No Tax on Tips Through 2028

Employees in IRS-listed, tip-customary occupations — such as servers, bartenders, bussers, and valets — can deduct up to $25,000 of qualified, reported tips from federal taxable income each year, subject to adjusted gross income phase-outs.

What this means for you: Restaurant owners must ensure that tips are accurately reported. This includes filing information returns with the IRS or SSA and providing employees with statements listing cash tips received and their job titles. The IRS has published the official list of eligible occupations and is offering transition relief for 2025 to simplify compliance.

No Tax on Overtime Through 2028

Eligible workers may deduct the overtime premium (the “½” above regular pay required by Fair Labor Standards Act (FLSA) regulations up to $12,500 ($25,000 for joint filers) per year, with income phase-outs. 

What this means for you: Employers must file information returns with the IRS or SSA and provide employees with statements showing total qualified overtime compensation paid during the year. Accurate record-keeping is essential to ensure compliance and maximize these deductions.

Why restaurant taxes are unique

Restaurants process lots of small transactions across many channels—dine-in, takeout, delivery apps, catering—and employ mostly hourly teams with tips. That mix creates more deductions and more filings. Here are some of the ways taxes are different for restaurants from many other types of businesses.

High-volume transactions, tip reporting, and multiple income streams

Daily POS batches, third-party delivery, and catering produce varied data. Plus, if a business is a food or beverage operation where tipping is customary and employs more than 10 employees on a typical business day in the previous year, Form 8027 must be filed annually.

Payroll-heavy operations with hourly employees

Tipped wages require proper withholding. Employers owe the employer share of Social Security and Medicare on reported tips, and many restaurants may claim the FICA tip credit on those employer taxes using Form 8846.

State and local sales tax considerations 

Prepared food and beverage sales often carry state and local tax, and tax filing cadences vary by jurisdiction. Keeping an accurate sales tax liability report and filing on schedule is key.

Key tax forms for small restaurants

The primary business tax forms restaurants are responsible for are an entity return, payroll filings, sales tax, and—if you’re large enough—annual tip reporting.

Form 1040 Schedule C (sole proprietors/single-member LLCs)

Business owners who operate as a sole proprietorship or single-member LLC must fill out Form 1040 Schedule C to report business income and expenses. 

Forms 1120 / 1120-S (corporations/S corporations)

File this form at the entity level if you’re a C-corp or S-corp. This annual report, also known as the U.S. Corporation Income Tax Return, reports corporate income or losses. 

Payroll forms (941, 940, W-2, W-3)

Quarterly payroll taxes are reported on Form 941, annual federal unemployment taxes are filed on Form 940, and employee wage information must be submitted each year on Forms W-2 and W-3.

Sales tax filings (state and local)

File on your state/local cadence. Keep the sales tax liability report reconciled each month.

Form 8027 for applicable businesses

Large food or beverage establishments (more than 10 employees on a typical day) must file Form 8027 each year to report receipts and tips. For 2025–2028, employers will also file new information returns to support the temporary “No Tax on Tips” deduction for workers in IRS-listed tipped occupations.

Top tax deductions for restaurant owners

The categories below cover the main deductions most small restaurants can claim. Keep receipts, invoices, contracts, payroll journals, and bank records organized so every expense is backed up if the IRS asks.

Payroll and employee-related expenses 

Restaurant owners can deduct wages, benefits, and employer payroll taxes. Reported tips are treated as taxable wages for payroll purposes, which means you must withhold income and payroll taxes and pay the employer share of Social Security and Medicare. To offset the FICA cost on tips, you may claim the FICA tip credit (Form 8846) for the employer share of payroll taxes on tips.

Note: The new “No Tax on Tips” deduction (2025–2028) is a deduction for employees, not the business. As a business owner, it is your responsibility to have accurate reporting and payroll compliance.

Cost of Goods Sold (COGS)

The cost of goods sold (COGS) covers the food, beverages, and ingredients that go into every plate. Deduct the actual cost, adjusted for inventory counts and spoilage. Monthly counts keep your numbers accurate, while weekly checks help high-volume restaurants spot waste or theft faster.

Rent, utilities, and occupancy costs

Deduct lease or mortgage interest, electricity, gas, water, internet, and common-area fees. Keep lease amendments with your year-end file.

Marketing and advertising

Deduct signage, website, photography, menu design, social media, and loyalty programs. Tag by campaign to review return on spend.

Equipment, furniture, and smallwares

Kitchens rely on ovens, refrigeration, ventilation, POS hardware, furniture, and smallwares. Consider Section 179 or bonus depreciation, where eligible; maintain an asset list with in-service dates and serial numbers.

Professional fees and licenses

Accounting, legal, consulting, health permits, food service licenses, and inspections are deductible. Store renewal receipts and certificates with your books.

Travel, meals, and entertainment

Business meals tied to operations (supplier meetings, site visits, recruiting) are generally 50% deductible. Keep notes on purpose and attendees on the receipt image.

Insurance

Deduct general liability, property, workers’ comp, and other policies appropriate to your operation.

Bonus deductions many restaurant owners overlook

Even well-run restaurants can leave money on the table by missing smaller but recurring deductions. The following expenses are often overlooked yet can add up significantly over the course of the year. Tracking these items carefully can reduce taxable income and improve your bottom line.

Bank and Credit Card Fees

Merchant discount rates, processing fees, and monthly statement fees should be categorized as business expenses, not deducted from revenue. Keeping detailed records ensures these costs are fully deductible.

Cleaning and Sanitation

Expenses related to maintaining a clean and safe restaurant — including chemicals, linens and laundering, hood cleanings, pest control, and third-party sanitation services — are deductible. These costs are especially important for compliance with health regulations, making them both necessary and tax-efficient.

Employee Uniforms and Branded Apparel

Required uniforms, branded gear, and protective clothing used for work are typically deductible. Reimbursing staff for uniforms or purchasing them directly can provide small but meaningful tax savings.

Delivery and Courier Expenses

Expenses related to delivery can include in-house delivery mileage reimbursements, third-party courier fees, and to-go packaging. Documenting these costs separately ensures they are recognized as deductible business expenses.

Software Subscriptions (POS, Accounting, Inventory)

Recurring software-as-a-service (SaaS) subscriptions for point-of-sale systems, accounting, inventory management, scheduling, and marketing are deductible. Even smaller monthly fees add up over the year, so tracking each subscription helps maximize your deductions.

Common mistakes small restaurant owners make with taxes

Whether you run an upscale restaurant or a laid-back bistro, the mix of cash, tips, payroll, and food costs can make taxes complicated. Most errors come from small oversights that are easy to avoid once you know where to look.

Mixing personal and business expenses

Blurring the line between personal and business spending leads to lost deductions and messy audit trails. For example, paying for groceries or a family dinner out of the business account can make it harder to prove legitimate expenses later.

• Fix: Open dedicated business bank and credit accounts. Pay only business expenses from those accounts, and use your personal accounts for everything else.

Underreporting tips or sales income

Missing sales or tip income (even unintentionally) can trigger penalties and IRS notices. It’s easy to overlook cash tips or third-party delivery payouts if they aren’t tracked closely.

• Fix: Reconcile your POS summaries to actual bank deposits, record both charged and cash tips in payroll, and document tip-outs. If you qualify as a “large” establishment, remember Form 8027 is required annually.

Forgetting depreciation on equipment

Skipping depreciation means your taxable income ends up higher than it should be. That walk-in fridge or pizza oven loses value over time, and so does your ability to claim deductions if you forget.

• Fix: Keep an up-to-date list of assets and review depreciation (including Section 179 options) with your tax professional before filing each year.

Failing to account for sales tax properly

Short payments, late filings, or miscalculations on sales tax can lead to notices and interest charges. This often happens when rates differ across dine-in, takeout, and catering.

• Fix: Reconcile your sales tax liability report monthly and set reminders for filing deadlines. Double-check whether your state requires separate filings for different types of food sales.

Misunderstanding the new 2025–2028 tip and overtime deduction rules

Some restaurant owners may mistakenly think the new tip law limits their own deductions for wages. It doesn’t. All wages, including overtime, are still fully deductible as business expenses. 

The new deduction only affects employees, and only the overtime premium (the extra 50% above base pay) qualifies. Without separating that premium in payroll or keeping job titles for tipped staff, your records may not support employee claims.

• Fix: Deduct all wages as usual. Track the overtime premium separately in payroll and keep job titles on file for tipped staff to support employee deductions.

Tips for streamlining restaurant taxes and compliance 

Between managing employees, inventory, customers, and putting out a dozen fires at once, your restaurant’s bookkeeping may get pushed to the back burner. Establishing strong systems for tracking payroll, tips, and expenses helps you stay compliant, reduce errors, and keep every dollar accounted for at tax time.

Automate payroll and tip reporting

Restaurants live and die by tip tracking, and errors here can trigger IRS scrutiny. Use a payroll system that:

• Creates separate pay types for cash tips, charged tips, and tip-outs to support accurate reporting.
• Tracks tip distributions to kitchen or bar staff to ensure payroll matches what employees actually receive.
• Generates reports that support the FICA tip credit calculation and flow correctly into year-end forms like W-2s.

Connect bank and credit card accounts

Manual data entry is where many small errors creep in. Linking your bank and credit card accounts directly to an accounting software system helps sync and categorize transactions automatically, such as food purchases under cost of goods sold (COGS).

Weekly reconciliations then take minutes, not hours, and recurring vendors like suppliers or linen services can be coded automatically for consistency.

Create targeted financial reports for your restaurant 

Accurate reporting helps you spot tax and operational issues before they grow. Review the following reports regularly to make smarter business decisions and keep records audit-ready. 

• COGS vs. Sales: If food costs suddenly run higher than usual, it may point to waste, spoilage, or theft. Catching it early keeps ingredient deductions accurate and defensible.
• Labor vs. Sales: If payroll takes up too much of sales, it signals overstaffing or scheduling inefficiencies. Clean payroll records ensure deductions for wages, taxes, and benefits are complete.
• Sales Tax Liability: A mismatch between sales and sales tax owed can flag undercollection or missed filings. Staying reconciled prevents penalties and keeps tax-deductible sales tax expenses correct. 
• P&L by Month: Reviewing your Profit & Loss statement each month can help you identify sudden increases or decreases in income or expenses right away, instead of discovering them at year-end. This ensures major deductions, like equipment repairs, are recorded in the correct tax year.

Standardize document storage

Lost receipts = lost deductions. Without proper receipts, the IRS can disallow expense deductions during an audit. Store all receipts, vendor invoices, and expense records digitally so they’re easy to locate if audited.

• Attach each receipt to its corresponding transaction or upload them into accounting software that links documents to expenses automatically. A centralized, organized system keeps everything in one place and makes collaboration with your accountant effortless.
• You can also store vendor contracts, leases, and insurance policies within the same platform for quick reference and a complete financial record.

Work with your accountant quarterly

A quick check-in with your accountant every quarter is far cheaper—and far less stressful—than a last-minute scramble in April. Partnering with an accountant regularly allows you to: 

• Correct misclassified expenses early.
• Reconcile payroll, sales tax, and COGS.
• Adjust for accruals or prepayments in real time instead of retroactively.

Integrate your POS and tip policies

Your point-of-sale (POS) system should record charged tips automatically and send daily sales data directly to your accounting system. This reduces manual reentry and ensures tip information flows correctly into payroll.

You’ll also want to document your tip policies in writing, share them during onboarding, and keep signed copies. Straightforward policies help avoid payroll errors and protect both your business and your staff.

Track overtime accurately

For proper tax reporting, separate base pay and overtime premiums in payroll. Recording the regular hourly wage and the extra 50% overtime rate as distinct pay types keeps employee records accurate and wages fully deductible for the business.

Create a filing deadline calendar 

Taxes come with deadlines that are easy to miss in a busy restaurant. Create a calendar that includes due dates for:

• Quarterly 941s and state sales tax returns
• Annual 940, W-2/W-3, and information returns

Keep Your Focus on the Kitchen, Not the Paperwork

After putting these tax and compliance tips into practice, the right tools can make managing them even easier. QuickBooks is an all-in-one accounting and payroll platform built to help restaurant owners stay on top of every financial detail—from tracking tips and wages to organizing expenses and preparing for tax season.

With QuickBooks by your side your books stay organized and your deductions accurate. The result? Less tax-time stress, fewer IRS headaches, and more freedom to focus on the restaurant you’re proud to run.