A restaurant can be busy every night and still lose money. The difference between a full dining room and a profitable one usually lies in a handful of figures that move every week: what you spend on food and beverage, what you spend on labor, and how cash flows in and out between busy and slow months. Our work with restaurant, cafe, bar and hospitality owners begins with those figures.
What does a restaurant’s profit actually depend on?
Most of a restaurant’s controllable spending falls into two categories. Cost of goods sold covers food, beverage and supplies, while labor covers wages, payroll taxes and benefits. Together they are known as prime cost, and they usually determine whether a month ends in profit or loss.
Rent, utilities and insurance matter as well, but they are largely fixed once the lease is signed. Prime cost is where an owner’s decisions register from week to week, through menu pricing, portion sizes, vendor terms, scheduling and overtime.
How do you bring prime cost under control?
You measure it often enough to act on what you see. A monthly profit and loss statement that arrives three weeks late describes what has already happened, whereas a weekly prime cost report shows what is happening now.
For example, a restaurant with $1.2 million in annual sales that runs food and beverage cost at 30 percent and labor at 33 percent has a prime cost of 63 percent, or $756,000. Reducing food cost by two points, through tighter portioning, recipe costing and regular reviews of vendor pricing, adds $24,000 a year to profit without a single additional cover. The same discipline applies to labor: separating labor costs by department, checking timekeeping for gaps and scheduling to forecast sales rather than habit.
The framework we use with owners is straightforward. Set a prime cost target suited to your concept, and track actual food, beverage and labor costs against it each week. When a figure drifts, identify the cause that same week. That routine, built on accurate point-of-sale and payroll data, is what allowed the restaurant in our case study to grow and to qualify for financing for its expansion.
What should owners know about tips and payroll taxes?
Tips are treated as wages for payroll tax purposes. Employees must report cash tips to you by the 10th of the following month once they reach $20 in a month, and you withhold income tax and the employee share of Social Security and Medicare on those tips, as the IRS explains in its tip recordkeeping and reporting guidance. Service charges that you distribute to staff are treated as wages, not tips.
You also pay the employer share of Social Security and Medicare on reported tips, at 6.2 percent and 1.45 percent for 2026 according to IRS Publication 15. If your servers report $300,000 in tips during the year, for example, the employer share on those tips is $22,950. Many restaurants can recover a substantial portion of that amount through the credit on Form 8846, which covers employer Social Security and Medicare taxes paid on certain employees’ tips.
Larger dine-in establishments, generally those with more than 10 employees on a typical business day, also file Form 8027 and may need to allocate tips if reported tips fall below 8 percent of gross receipts. For 2025 through 2028, employees may be able to deduct qualified tips on their own returns, up to $25,000, as described in the IRS overview of the no tax on tips deduction. Your reporting obligations as an employer continue, and accurate tip records now matter to your staff as much as they do to your business. Our Payroll Plus team handles this reporting every pay period.
How should a restaurant plan for equipment and build-outs?
Kitchen equipment, furniture and point-of-sale systems are significant purchases, and timing them well can reduce your tax liability. For property placed in service in 2026, the Section 179 limit on immediate expensing is $2,560,000, phasing out once qualifying purchases exceed $4,090,000, under Revenue Procedure 2025-32. Separately, 100 percent bonus depreciation was restored for qualifying property acquired after January 19, 2025, per the Form 4562 instructions.
Accelerated write-offs are not always the better choice. If you expect higher income in later years, or you need strong reported profit to qualify for a loan, spreading deductions over several years may be the sounder course. We model both approaches before you commit to the purchase.
How does SBA CPA work with restaurants?
We keep your books current each month, reconcile point-of-sale data to the bank, run payroll and tip reporting through Payroll Plus, and file your sales tax returns, including in home-rule cities that collect their own. For owners who want deeper support, our virtual CFO service adds weekly prime cost reporting, cash flow forecasts and a plan for the next location. The first step is an introductory call with our client services team.