Restaurant tax debt: payroll, tips and sales tax

Thin margins and weekly payroll make it tempting to use withheld payroll tax or collected sales tax to cover food costs and rent "just this once." Both are trust money. Unpaid withheld income tax and the employees' share of Social Security and Medicare can become a personal Trust Fund Recovery Penalty against owners and managers who decide which bills get paid. Many states similarly hold responsible people liable for collected sales tax that wasn't remitted.

Employees must report cash and card tips of $20 or more in a month to the employer, and the employer withholds income tax and the employee share of Social Security and Medicare on those tips and pays the employer share — see the IRS tip recordkeeping and reporting page. Under-reported tips mean under-deposited payroll tax, and the IRS can assess the employer's share on tips it estimates weren't reported.

Large food or beverage establishments — generally those where tipping is customary and that normally had more than 10 employees on a typical business day in the prior year — file Form 8027 each year reporting receipts and tips. If reported tips fall below 8% of gross receipts, the employer may have to allocate the difference to directly tipped employees. Big gaps between card tips and reported tips are a common audit starting point.

• Missed 941 deposits during slow seasons, which compound with failure-to-deposit penalties.
• Sales tax returns filed without payment, or not filed at all.
• Payroll taxes left unpaid after a closure — closing doesn't erase trust fund liability.
• Owners paid as contractors or in cash, creating worker classification issues.

File every missing return, even without full payment, so filing penalties stop growing. Make current deposits on time to stop the pile from growing — the IRS is far more flexible with a business that is current. Then compare the business payment plan limits with your balance, and take the free business tax relief assessment with "Restaurant" selected.