Restaurants fail on margin, not on ideas. The accounting that matters is not the annual return — it is the weekly discipline that tells you whether last week actually made money, early enough to change something. This guide covers that discipline plus the tax rules unique to food service.
Prime cost is the number
Prime cost is cost of goods sold plus total labor, including payroll taxes and benefits, expressed as a percentage of sales. It captures the two costs you control day to day, and it is the single most useful figure in restaurant management. Most full-service operations aim to hold it at or under 65% of sales; quick service and counter concepts generally target closer to 60%.
- Food cost commonly runs 28% to 35% of food sales, depending on concept and menu mix.
- Beverage cost is usually far lower — often in the high teens to low 20s for liquor — which is why beverage mix moves overall margin so much.
- Labor typically lands between 25% and 35% of sales, and it is where a slow week does the most damage.
- Occupancy is the fixed floor beneath both, commonly 6% to 10% of sales for a well-sited location.
A monthly inventory count tells you about a problem four weeks after it started. A weekly count with a theoretical-versus-actual food cost comparison catches over-portioning, waste, and theft while the week is still recoverable. Many operators also close on a 13-period calendar of four weeks each, so every period contains the same number of Fridays and Saturdays and comparisons actually mean something.
Tips: the reporting nobody enjoys
Tips are wages for tax purposes even when the money never passes through your bank account. Employees who receive $20 or more in tips in a month are required to report them to you in writing by the tenth of the following month, and you withhold income and FICA tax on the reported amounts and include them on the W-2.
Larger operations have an extra layer. A large food and beverage establishment — broadly, one where tipping is customary and more than ten employees work on a typical business day — files Form 8027 annually, and if reported tips fall below 8% of gross receipts, tips are allocated to employees to make up the difference. Careful point-of-sale tip capture is what keeps you out of allocation territory.
Service charges are not tips
An automatic gratuity on a large party, a banquet service fee, or a mandatory delivery charge is a service charge, not a tip. That means it is your revenue first and ordinary wages when you distribute it — subject to payroll tax, includable in the regular rate for overtime, and not eligible for the tip credit. Menus and POS systems that treat the two identically create back-pay exposure quietly.
The FICA tip credit is real money
You pay the employer share of Social Security and Medicare on tips your employees receive, even though you never had the cash. Section 45B gives most of that back as a credit, claimed on Form 8846, for the employer FICA paid on tips above the amount needed to bring wages to the federal minimum in effect for this purpose. For a restaurant with heavily tipped staff, the credit routinely runs into the thousands or tens of thousands of dollars a year — and it is one of the most commonly missed credits we see on returns prepared elsewhere.
Two conditions matter. The credit is limited to food and beverage establishments, so a salon or a barbershop with tipped staff does not qualify — a distinction covered in the salon and retail guide. And it depends entirely on tips being properly reported through payroll, which is one more reason casual tip handling costs more than it saves.
Every dollar of tips that skips payroll costs you the credit on it, and buys you an exposure you did not need.
Third-party delivery: record gross, not net
Delivery platforms deposit net proceeds — sales minus commission, minus fees, sometimes minus tax the platform collected as marketplace facilitator. Booking that deposit as revenue understates both your sales and your costs, and it destroys any comparison between platform and dine-in margin. Record the gross order value as sales, the commission and processing as expense, and reconcile to the deposit. When you finally see platform sales at full commission next to their contribution margin, the pricing decision usually makes itself.
Gift cards, comps, and other quiet liabilities
- Gift cards sold are a liability, not revenue. Revenue is recognized when the card is redeemed, and unredeemed balances may fall under state unclaimed property rules.
- Comps and employee meals reduce revenue or become a separate expense depending on your policy, and several states have specific sales tax treatment for each.
- Sales tax collected on prepared food is a liability from the moment you collect it — prepared food often carries a higher combined local rate than the general one, as covered in the sales tax guide.
- Tips payable between the shift and the paycheck are a liability too, and they should never sit inside your operating cash figure.
Build-out, equipment, and the deductions worth planning
Kitchen equipment, furniture, and much of a leasehold build-out can often be written off far faster than the straight-line assumption most owners carry, through Section 179, bonus depreciation, or a cost segregation study on a larger project. The catch is that these are timing decisions with a December 31 deadline, and the limits change with legislation — confirm current-year rules before you sign the equipment order, not after. The deductions small businesses miss covers the rest of the list.
The operating rhythm that works
- 1Daily — enter a daily sales journal from the POS: gross sales by category, tax collected, tips, comps, and settlement by payment type.
- 2Weekly — count inventory, run prime cost, and review labor against sales while the schedule can still be changed.
- 3Monthly or by period — close the books, reconcile every account, and read the P&L against the same period last year.
- 4Quarterly — payroll filings, estimated taxes, and a look at whether the entity structure still fits the profit.
If that rhythm is not happening today, the fastest fix is to hand off the parts that repeat: payroll with tip handling built in, and bookkeeping closed monthly with your POS feeding it. For multi-unit operators, the next step up is CFO advisory — cash forecasting and unit economics rather than compliance. The wider picture is in the local business accounting guide, and once profit stabilizes, the LLC versus S-Corp math is worth running. This article is general information, not tax advice for your specific situation.