Tax Planning for Restaurants: Don’t Leave Money on the Table – How the FICA Tip Credit and Other Strategies Save You Thousands

Every January Mike’s Bistro went quiet. During the Holiday season there was barely time to breathe. Lines out the door, catering orders piling up, and staff pulling double shifts. He assumed the income from the holiday rush would be enough to carry him through the slow season. But, by the third week of January the rush was gone and his bank balance told a harsh truth: Mike had no cushion and no plan. The bills started stacking up and he had to dip into his personal savings to keep the doors open.

Social media is flooded with sensational claims about “the path to zero tax.” Influencers and so-called experts are eager to share tax loopholes or hacks to avoid paying taxes altogether. But what’s real, and what’s just hype? Let’s separate myth from reality, so you can make informed, responsible decisions and avoid costly mistakes.

A Candid Conversation That Revealed a Deeper Problem Just last week, I met with a restaurant owner whose operation appeared—at least externally—to be thriving. His dining room was consistently active, yet beneath that surface of apparent success was a financial trajectory that had been quietly deteriorating for months. Despite steady revenue, he was withdrawing money from his savings every single month to cover operating expenses. He admitted he had been reluctant to raise prices, relying instead on what surrounding restaurants were charging rather than on his own cost structure. His hesitation was rooted in fear—fear of guest backlash, fear of making things worse. But the numbers were unequivocal: If he continued operating under the same assumptions, he would exhaust his resources and have to close the doors within 18 months. The Crucial Question: “When Did You Last Cost Your Menu?” When I asked when he had last conducted a comprehensive plate-costing analysis, he paused, then confessed he couldn’t remember. He had a general sense of which items were “profitable,” but that belief was based more on intuition than on data. To establish a baseline, we chose one of his higher-priced, supposedly high-margin entrées and examined it in meticulous detail. Together, we itemized every cost associated with that dish: the ingredients, the small plastic containers for butter and cream, the complimentary rolls, and even the to-go packaging that roughly one-third of guests utilized. What emerged from that analysis was sobering. A plate he believed was generating strong profit was, in reality, carrying a 40% cost—a level that left little room for labor, overhead, or debt service. And if this was true for one flagship menu item, we both understood it was likely symptomatic of the entire menu. Menu Costing is Essential I reminded him of a truth we see repeatedly: restaurant owners often assume that their best-selling items are also their most profitable, even though these two metrics rarely align without deliberate cost control and menu strategy. You cannot manage what you have not measured. Menu costing provides more than clarity; it provides a structured method for transforming a menu from a passive list of offerings into an intentional, revenue-driving instrument. A Clearer Path Forward 1. Establish Data Integrity - Calculate plate costs with accuracy, capturing all expenses that typically slip through the cracks. 2. Identify Profit Leaders and Margin Eaters - Identify which dishes are supporting the business and which ones are quietly eroding margins. 3. Implement Strategic, Evidence-Based Pricing - Armed with reliable numbers, adjust prices—not reactively or fearfully, but with rational confidence. 4. Reposition the Frontline Team as Sales Professionals - Inform the staff which items truly contribute to financial stability, enabling them to guide customers intentionally Most owners are overwhelmed by the idea of auditing an entire menu, but the process truly begins with a single plate. Analyze one thoroughly, and you may uncover insights that fundamentally reshape how you view your business. Accurate, consistent plate costing is the cornerstone of profitability. Once you have it, even incremental adjustments can yield meaningful improvements. Your Menu Holds Untapped Value — Let’s Reveal It Countless restaurants operate with hidden vulnerabilities simply because their menu has not been designed to support the business strategically. Menu costing is not merely a financial exercise; it is a lifeline for owners who want their restaurants to thrive rather than survive month-to-month. If you’re ready to understand the true profitability of your menu and create a pricing structure that sustains your business, we can guide you through the process—and help you write a success story rooted not in guesswork, but in clarity and control. Schedule a free advisory session now.

While Return on Investment tells you whether past investments paid off, forecasting it ahead of time can help you choose the right opportunities and avoid costly mistakes. Restaurants have such slim profit margins that ROI isn’t optional. It’s survival. This is a lesson one restaurant owner learned the hard way. Meet David. David is a typical small restaurant owner. He is passionate about food and creating the best possible experience for his customers. But, like many independent restaurant owners, when it comes to big decisions, David trusted his gut. And it nearly sank his business. In late winter, David decided to invest $25,000 to expand with an outdoor seating area. He believed it would bring in more customers during the spring months, which would boost revenue and set him apart from the competition. But David never sat down to do the math. He didn’t ask any questions. How many new customers would this expansion really bring in? How long would it take to recoup the investment? Do current customers even want this change? Passion is essential in business. But numbers keep the doors open. At first, the buzz was exciting. Photos of the upgrade went up on social media and looked amazing. The marketing campaign brought in a small burst of interest, but few repeat customers. But, by the middle of summer, the numbers told a different story. Total revenue increase from outdoor dining: only $7,000 Unexpected costs: $3,000 in permits, $2,000 in maintenance Weather delays: Lost 4 peak weekends due to rain Net profit? Basically zero Worse, the investment delayed upgrades to his kitchen, which caused longer wait times and affected customer satisfaction. David had sunk $25K into something that felt right—but didn’t pay off. How ROI-Based Decision Making Could Have Helped If David had used a simple ROI based decision-making process , things could have turned out very differently. Here are what those steps would have looked like. 1. Understand ROI Basics Projected net profit is calculated by subtracting the projected costs from the expected revenue over a specific period of time. For example, if you want your project to produce a return on investment over three years, you would project your net profit over three years. Then, to find the percentage of ROI, divide the projected net profit over time by the estimated cost of the project (investment), then multiply the result by 100. ROI = ((net profit – investment) / investment) x 100 2. Identify Decision Area For restaurants there are many areas that could be analyzed for return on investment. Things to consider would be new equipment, menu changes, or investments in technology, such as an updated POS System. David should have asked: “Will outdoor seating bring in more profit than other things I could invest in?” This would have given him more insight into the best area to focus his capital. 3. Estimate All Costs As we all know, most investments end up costing more than we originally expected. Think about legal fees, market research and insurance. Instead of assuming $25,000 was the final price, if David had done some more research he would have realized he needed to include costs for permits and licensing and extra maintenance costs. 4. Forecast the Returns How can you forecast realistic return on investment? Use historical data or industry benchmarks when possible. Also, look at average foot traffic and sales from previous years. David didn’t factor in the extra time for table turnover in an outdoor space. Research shows that people may stay longer for a meal when seated outside. After considering all the factors David might have decided to invest his money in an endeavor that had the potential of a much better ROI. 5. Calculate ROI After completing all of the research, now is the time to calculate the projected return on investment. After plugging your forecasted numbers into the ROI formula, it is important to ask questions about the results. How long will it take to break even? Is the ROI positive, and over what period of time? Is there a better place to invest that capital? For David, he would have come up with a negative ROI in year one. This would have given him the opportunity to do more research or refocus his goals. 6. Compare Alternatives If you’re choosing between options (e.g., a new fryer vs. a marketing campaign), calculate forecasted ROI for each and compare. Then you can choose the one with the best ROI and strategic fit . (Use our free ROI comparison calculator to compare options.) What if, instead of outdoor seating, David spent $8,000 on a new kitchen line to speed up service? If that option showed an ROI by end of year 4, it would be a better option. Here is an example:

Passwords are like old bike locks: they do work, but sometimes, they just aren’t enough. That’s because hackers are clever, and they want your info. That’s where Multi-Factor Authentication (MFA) comes in. It’s a fancy name for a simple idea: let’s make it much, much harder for the bad guys to break in.

A Red Flag That Started It All Lakeview Hospice Care, Inc., a family-run hospice agency in Burbank, California, found itself in Tax Court after what began as a routine red flag: its corporate tax return showed no officer compensation . For a C corporation with active owners, that’s a problem. The IRS expects a corporation to compensate its officers if they’re performing services. When a company has substantial revenue but reports zero officer wages, it signals that something may be off in the accounting. That missing salary line on the return caught the attention of the IRS , prompting an audit. But when the revenue agent started digging, she uncovered much deeper issues in the company’s bookkeeping. A Bookkeeping System That Didn’t Add Up Lakeview’s books were maintained by a long-time outside bookkeeper who had set the company up on an accrual accounting system. Unfortunately, the system wasn’t being used properly. Among the problems the IRS found: Accounts receivable were reversed to zero without explanation. The general ledger contained numerous vague “adjusting journal entries” labeled simply as “reverse of year-end accruals.” Invoices were handled manually — stamped “paid” and placed in folders — instead of being linked to the ledger or billing system. No monthly reconciliation was done between the bank accounts and the books. The company’s records didn’t match its billing activity or its bank deposits. Although the books were labeled “accrual basis,” the data didn’t actually reflect income when it was earned or expenses when incurred. That inconsistency gave the IRS authority under Section 446(b) of the tax code to disregard Lakeview’s accounting and reconstruct its income using another method. The IRS Turns to the Bank Deposits Method When books are incomplete, the IRS can use the bank deposits analysis to estimate income. The auditor adds up all deposits for the year, then adjusts for: Nontaxable items (like account transfers or shareholder contributions), and Changes in receivables and payables to approximate accrual-based income. Using this method, the IRS initially claimed Lakeview underreported more than $200,000 in income across two years. The Tax Court agreed that the auditor’s method was appropriate — Lakeview’s records simply didn’t “clearly reflect income.” But the Court also found that the IRS’s totals were too high , because the company’s explanation for certain deposits made sense. Some of those deposits came from owners, refunds, or other non-taxable sources — not from hospice revenue. The judge accepted Lakeview’s adjustments and ruled that those amounts should be removed from income. ✅ In short: Lakeview lost on the method but won on the numbers. Where Lakeview Lost Ground: The Deductions The Court did not, however, side with Lakeview on its expenses. Some of the questioned deductions included $222,000+ in “miscellaneous accruals,” Advertising expenses paid to a related person “Other deductions” $171,000+ Net Operating Loss from a prior year When pressed, Lakeview couldn’t provide invoices, receipts, or other proof. Some expenses were handwritten, others were tied to related parties, and others were simply labeled as “accruals” with no support. The judge sided with the IRS - those expenses lacked substantiation and the deductions are disallowed. The net operating loss was also denied because the company couldn’t back it up with prior-year records. In short, Lakeview’s bookkeeping errors erased many of its deductions. A Mixed Result — and a Pending Bill Judge Holmes called it a “mixed result.” The IRS was right to question the books and reconstruct income, but Lakeview was right that not all deposits were taxable. The company avoided penalties because it had relied — in good faith — on professional help. But the Court ordered that the final tax amount be computed later under Rule 155 , a standard procedure to calculate the final bill after applying the Court’s adjustments. So, while we don’t yet know how much Lakeview will owe, it’s likely to be a significant tax balance – probably tens of thousands - once the math is finalized. My Opinion on this Case: When Business Owners Don’t Provide the Data There’s an old saying in the accounting world: “Garbage in, garbage out.” No matter how skilled a bookkeeper may be, they can only work with the information they’re given. If a business owner doesn’t provide timely bank statements, credit card records, invoices, and receipts, the financial reports — and the tax returns based on them — will never be accurate. Many accounting and bookkeeping firms struggle with this same issue. It’s not always carelessness on the bookkeeper’s part; sometimes it’s simply that the client hasn’t provided the data needed to close the books correctly. In Lakeview’s case, that may have been a big part of the problem. The outside bookkeeper set up an accrual system, but without complete input from management, the records never reflected reality. At the same time, this doesn’t absolve the outside bookkeeper of responsibility. The Tax Court seemed to recognize that balance — removing the penalties partly because Lakeview had relied on a professional, but still making it clear that the bookkeeping itself was unreliable. In my view, a competent bookkeeper should press harder for accurate information or even disengage if the client won’t provide it. Personally, I would have fired this client rather than continue producing records that I knew weren’t accurate. A professional’s duty isn’t just to record what’s handed to them, but to ensure that the books meet quality standards and will stand up in audit. Takeaway Tips: How to Avoid Lakeview’s Mistakes Always report officer compensation. Even for C corporations, listing zero wages when officers are active can draw attention from the IRS. Use accrual accounting correctly. Record income when earned, and expenses when incurred — not just when money moves. Keep complete documentation. Every deduction should be backed by invoices, receipts, or agreements. Ledger entries alone aren’t enough. Reconcile your accounts monthly. Your bank activity, billing system, and accounting software should always line up. Give your bookkeeper what they need. Timely access to bank statements, credit card accounts, and supporting paperwork is essential. Your financials can only be as accurate as the information you provide. Author’s Note Written by KAC Consulting, Inc. — a firm specializing in bookkeeping, tax advisory, and resolution services for small businesses. We help owners maintain clean, compliant records and audit-ready financials. 📅 Don’t wait until tax season to find out there’s a problem. Contact us before year-end for a professional books review and make sure your financials are accurate, complete, and audit-ready.

Meet Jake. Jake is a hardworking general contractor who needed to hire extra hands during a particularly busy summer. He didn’t want to deal with payroll taxes or paperwork, so when his helpers asked how they’d get paid, he said, “You’re contractors. I’ll just write you a check every week.” Easy enough—or so he thought... When tax season rolled around in January, Jake’s tax preparer asked him for W-9 forms for all of his contractors so she could prepare their 1099-NEC forms. He hadn’t collected any information for any of them. He had names and phone numbers. Which is not enough. When 1099 Reporting Kicks In Here’s the deal: If you pay independent contractors $600 or more during the year (see below for changes to 2026 reporting), you may have to issue form 1099-NEC to report payments for services performed for your trade or business. How do you know who needs to receive a 1099? The IRS guidelines state that if the following four conditions are met, you must generally report a payment as non-employee compensation. You made the payment to someone who is not your employee. You made the payment for services in the course of your trade or business. You made the payment to an individual, partnership, estate, or in some cases, a corporation. You made reportable payments to a payee that total the threshold amount or greater during the year. Which is $600 for 2025. (An Important Note: The new $2,000 threshold signed into effect by the OBBB starts in 2026 for payments made after December 31, 2025. Don’t let rumors fool you—keep collecting those W-9s and issue 1099s for $600+ payments this year.) To correctly issue 1099 forms to your contractors, they will need to fill out a W-9 — the form that gives you their name, address, and taxpayer identification number (SSN or EIN). Jake didn’t know this, so he was missing the one thing he needed most — their tax IDs. The January Headache Instead of kicking off the new year with fresh projects, Jake spent hours chasing down contractors. He called. He texted. He left message after message. Some replied right away — but others had new phone numbers, moved away, or just vanished , taking Jake’s peace of mind with them. The IRS 1099 filing deadline was fast approaching, and Jake couldn’t complete half of his forms. There are two big issues when you pay contractors without getting a W-9: Issuing the 1099 — the problem everyone knows about. Without the contractor’s SSN or EIN, you can’t correctly issue a 1099, and the IRS may fine you for missing or incorrect forms. Backup Withholding — the problem no one talks about. And this one can cost you money. The Backup Withholding Trap Here’s what the IRS expects if you make payments to a contractor that are equal to or greater than the $600 threshold: Make sure you have the contractor’s name, address, and Tax Identification Number on a form W-9. This ensures you have everything you need to issue Form 1099. If you don’t have the contractors’ Taxpayer Identification Number, you must withhold 24% of their payment and send it to the IRS. This is called backup withholding . This is a very common area of non-compliance. The law (IRC 3406(a)(1)(A)) states backup withholding is required if the payee fails to furnish his Tax Identification Number to the payor. Let’s put this in Jake’s world. Jake paid one of his missing contractors $1,000 for some deck work. Since he never got a W-9 he should have withheld $240 (24%) and paid the contractor $760. The $240 would have been sent to the IRS. In this scenario, that $240 is not Jake’s money, it was the contractors, and Jake would be paying the tax on behalf of the contractor. But, here is the bad news. When the IRS reviews Jake’s filings and notices the missing forms or unreported payments, they will assess that tax against Jake, not the contractor. That means Jake could be on the hook for that $240, plus penalties and interest. The Cost of Procrastination By the time Jake finally tracked down a few of his contractors, the filing deadline had passed. He ended up filing some 1099s late, paying penalties, and still couldn’t report the payments for the ones who disappeared. And the worst part? All of it could have been avoided with five minutes of paperwork before cutting that first check. Jake’s New Rule (It Should be Yours Too) Now, Jake won’t let anyone lift a hammer until he gets their W-9 . His new motto: “No W-9, no pay.” If you pay contractors, learn from Jake’s mistake: ✅ Always collect a W-9 before making the first payment. ✅ If you don’t have one, start backup withholding (24%) AND pay that to the IRS. ✅ Remember, if you skip both, the IRS may come after you , not the contractor. Moral of the story: Paperwork may not be fun, but it’s a whole lot easier than trying to hunt down missing contractors in January. How can KAC Consulting, Inc. help? If you would much rather focus on the parts of your job that you love most, or you need help with bookkeeping and compliance, please contact us today and let's see how we can work together!

Managing payroll can feel overwhelming for small business owners. Between tracking hours, filing taxes, and staying compliant, it’s easy to lose valuable time. That’s why we partner with Gusto, a modern payroll platform designed to make the process simple and stress-free. Gusto automates the hard parts of payroll. It syncs employee hours, calculates taxes, and files forms automatically. You can run unlimited payrolls without extra fees and even customize pay schedules for different employees. Everything is handled in minutes, so you can focus on growing your business instead of crunching numbers. Why Gusto? Gusto makes payroll and HR simple, fast, and affordable: Finish payroll in minutes – Employee hours sync automatically, and taxes/forms are filed for you. Unlimited payroll runs – Pay weekly or customize schedules at no extra cost. Integrated time tracking & PTO – No more spreadsheets! Workers’ comp made easy – Pay-as-you-go options, no lump sums. Beyond payroll – Health insurance, 401(k), and other benefits in one platform. No hidden fees – Big company service at a small business price. Benefits Your Team Will Love Beyond payroll, Gusto offers benefits your team will appreciate. Health insurance, 401(k) plans, and workers’ compensation are all integrated into one easy-to-use dashboard. Employees can manage their benefits online, request time off, and access important documents without piles of paperwork Health plans tailored to your budget. Automatic syncing of benefits and payroll. Paperless onboarding and HR tools. Employee perks like Cashout for unexpected expenses. Ready to Get Started? We offer two ways to get started. If you want a hands-off approach, let KAC and Gusto manage things for you. Our team and Gusto will ensure compliance and accuracy for your payrolls! Do you prefer to do it yourself? Use our referral link to sign up for Gusto and enjoy all the features directly. Option 1: Let KAC Consulting, Inc and Gusto handle everything for you. We’ll manage your payroll and HR so you can focus on growing your business. * 👉 Contact us here or call us: 210-988-2841 to learn more. Option 2: Prefer to do it yourself? Sign up for Gusto using our referral link and enjoy all the benefits. Plus, once you pay your first invoice, you will receive a $100 Visa gift card. * 👉 DIY with Gusto Payroll Referral Link *And yes, KAC Consulting, Inc. earns a little something too.

KAC Consulting, Inc: The Founder’s Story