Bookkeeping and Tax for Restaurants in Los Angeles

Situations We Handle

Tips on payroll and Form 8027. Employees keep a daily tip record and report their cash tips to the employer unless the total from that employer is under $20 in a month; tips the employer never learns of go on the employee's Form 4137. A service charge the restaurant adds to the bill and pays to staff is not a tip but wages, reported on Form W-2. A large food or beverage establishment, where tipping is customary and more than 10 employees worked on a typical business day in the preceding year, files Form 8027 each year: for 2025, by March 2, 2026 on paper or March 31, 2026 electronically, and anyone filing 10 or more information returns must file electronically. When reported tips are under 8 percent of gross receipts, the shortfall is allocated to the employees by gross receipts or hours worked. We run the payroll with the reported tips, prepare the W-2s and Form 8027, and file Form 941 and the DE 9 and DE 9C each quarter. See Payroll.

The Form 8846 credit on the business return. The credit equals the employer's Social Security and Medicare tax, 7.65 percent, on employees' reported tips, except tips used to bring pay up to the federal minimum wage of $5.15 an hour in effect on January 1, 2007; when cash wages are $5.15 an hour or more, every reported tip counts. A partnership or S corporation must file Form 8846 to claim it, the credit is part of the general business credit, and it can be claimed on an original or amended return within 3 years. Since California's minimum wage is $16.90 an hour and tips may not be counted toward it, all tips reported through payroll qualify. We compute the credit from the payroll records and attach the form to Form 1120-S or Form 1065. See Business Tax Preparation.

Sales tax on food, to-go orders and service charges. In California all sales are taxable unless an exemption applies. Hot prepared food to go is taxable; cold food to go, such as cold sandwiches, salads, ice cream and smoothies, usually is not; hot coffee and tea to go are not taxable; soda and alcoholic beverages always are. Under the 80-80 rule, a restaurant whose gross receipts are more than 80 percent food and whose food sales are more than 80 percent taxable charges tax on all to-go sales unless it elects to account separately for cold to-go food. An optional tip, gratuity or service charge is not taxable; a mandatory one is part of taxable gross receipts even when it is paid out to employees, and corkage fees and cover charges are taxable. The City of Los Angeles rate is 10.25 percent from October 1, 2026, up from 9.75 percent; Burbank and Glendale charge 11 percent, Calabasas 11.25 percent, Agoura Hills and Westlake Village 10.25 percent, Thousand Oaks 7.25 percent, Oxnard 9.25 percent and Irvine 7.75 percent. The books carry taxable sales, nontaxable sales, optional tips and mandatory charges in separate accounts so the sales tax return can be prepared from them.

Wages, overtime and the new deductions. The state minimum wage is $16.90 an hour from January 1, 2026, and the City of Los Angeles minimum wage is $18.42 an hour from July 1, 2026, adjusted each July 1. The $20 fast food minimum wage applies only to limited-service restaurants belonging to a chain of at least 60 establishments nationwide. Tips are not part of the regular rate for overtime, and credit card tips are paid by the next regular payday with no deduction for processing fees. Under the 2025 federal law, an employee in an occupation the IRS lists as customarily tipped may deduct up to $25,000 of voluntary cash or charged tips a year, and up to $12,500 ($25,000 on a joint return) of the overtime premium, both phasing out above $150,000 of modified adjusted gross income ($300,000 joint), so the payroll records keep tips and the overtime premium identifiable for each employee's return.

Sales, inventory and the owner's return. Each day's register sales, delivery platform deposits, vendor bills and the bank and card accounts are recorded and reconciled monthly, with a profit and loss statement and a balance sheet at month end. A restaurant whose average annual gross receipts for the three prior years are $31 million or less for 2025 returns, $32 million for tax years beginning in 2026, is a small business taxpayer that need not keep tax inventories; a larger one values its inventory each year to figure cost of goods sold. The owner's return is prepared from the same books: Schedule C for a sole proprietor, or Form 1040 with the K-1 from the S corporation or partnership. See Bookkeeping and Individual Tax Preparation.

The City of Los Angeles business tax. A restaurant in the city holds a Business Tax Registration Certificate and is taxed in the retail sales class at $1.27 per $1,000 of gross receipts; a registered business with worldwide gross receipts of $100,000 or less pays no tax when it files its renewal on time, and the renewal is due by the last day of February. The books give the gross receipts figure the renewal needs. See CPA in the San Fernando Valley.