Understanding tax liability is an important part of any small business start-up plan. I could not find a good summary of all the various taxes because they include federal, state, county and municipal jurisdictions. This discussion is meant to give owners some guidance on what to expect and how to stay compliant in Shelby County Tennessee, but in no way should supplant a discussion with a CPA.
The first thing you have to do is obtain a Federal Employer Identification Number (FEIN or simply EIN). This is kind of like your business’ social security number, and it will become your primary identifier for not only federal tax business, but state, local and even vendor credit applications. You can obtain it for free at the IRS website. Don’t be fooled by all the other websites that claim to help you get this number for a fee. It is free!
Obtaining an EIN also notifies the IRS that you are planning to operate a business and will most likely have some taxes to pay, including most notably, income and employment taxes. You will receive a letter in the mail within a week or so from The Electronic Federal Tax Payment System (EFTPS). EFTPS is an online tool provided by the Treasury Department (IRS) that allows you to pay your federal taxes online or by phone. You will be given an account and a pin and there are detailed instructions on the website.
Employment taxes must be reported quarterly via Form 941. You generally must withhold federal income tax from your employees’ wages. You withhold part of Social Security and Medicare taxes from your employees’ wages and you pay a matching amount yourself. Employment taxes are due quarterly unless wages exceed $50,000, in which case they are due semi-monthly. You report and pay FUTA tax once a year separately from Federal Income tax, and Social Security and Medicare taxes. You pay FUTA tax only from your own funds. Self Employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.
Federal income tax is beyond the scope of this post and should be discussed a CPA.
Every restaurant will need to pay several state taxes. This post will detail the taxes a business must pay in the state of Tennessee to operate. While every state is different, the following description of state taxes should provide enough information for getting started in your own state.
Once you have your EIN you can set up your business entity with your state. Most states including Tennessee have very user-friendly websites to help you with this process. In Tennessee you go on to the Secretary of State’s website and click on “Form or Register a New Business.” After selecting the type of entity you desire (see other blog post for discussion on this topic) the website will walk you through the process. After you’ve paid the $300 (annual) fee using a credit card, your official paperwork will be mailed to you and you will be registered in Tennessee.
This entity registration process also alerts the Tennessee Department of Revenue that a new business has started and they need to collect some taxes. The following is a discussion of state taxes that you will likely be responsible for paying. You can register for most Tennessee taxes at https://apps.tn.gov/bizreg/.
Sales and Use Tax: This is perhaps the most important tax registration you need to complete as a small business owner because it allows you to buy from wholesalers without paying sales tax, as long as the product you buy is intended for resale (you will collect the sales tax from the customer and remit to the state). After registering you will receive a “Blanket Certificate of Resale” from the state containing your sales and use tax identification number. You will need this number and/or the form for all of your wholesale vendor accounts.
Once you’ve received your sales and use tax number you will also start receiving tax returns from the state that need to filed on a monthly basis (or you can file online at https://apps.tn.gov/sales/) even if you have zero sales. The counterpart to sales tax is the use tax. The purpose of the use tax is to collect “sales tax” on items not intended for resale that you bought where the vendor did not collect sales tax. The tax rate for both these taxes is 7% plus the additional local sales/use tax which is generally another 2.25% but varies between 1% and 2.75% (https://apps.tn.gov/sales/).
Franchise and Excise Tax: These taxes are privilege taxes business entities have to pay in Tennessee. You can register for this tax at https://apps.tn.gov/bizreg/ and it must be paid by the 15th day of the 4th month following the close of your books and records (generally April 15). The franchise portion of the tax is .25% of the greater of net worth or real and tangible property in Tennessee, with a minimum tax of $100. The excise portion is 6.5% of Tennessee taxable income.
Alcohol Sales Tax: If you are restaurant licensed to serve liquor-by-the-drink, then you will be liable to the Tennessee Department of Revenue for a tax equal to 15% of gross receipts from such sales, in addition to sales tax (for a combined rate of 24.25% in most counties). This tax is due by the 15th of each month.
State Unemployment: The last “tax” is not really a tax, but you’ll be responsible for paying it if you have employees, so a brief discussion here is apt. With each payroll you will be responsible for paying into the state Unemployment Insurance Program. The Tennessee Department of Labor and Workforce Development administers the program, which pays state unemployment benefits. To register you must complete and return the following report: http://www.tn.gov/labor-wfd/Employers/forms/LB-0441.pdf. You will be assigned a UI number and rate and will be responsible for remitting payments based on the taxable wages paid. Employers are required to report payroll and pay the total unemployment insurance premiums due for each quarter by the end of the month following the end of the quarter (i.e. Apr. 30, Jul. 31, Oct. 31, and Jan. 31).
Municipal and County Taxes
Every restaurant will need to pay local municipal and county taxes. Here are some taxes that businesses operating in Shelby County must pay:
Muni and County Business Taxes: Tennessee Department of Revenue is responsible for collecting municipal and county business taxes, which almost all areas of Tennessee charge for the privilege of doing business there. You’ll have to go to the city and/or county clerk to obtain your first business license (usually about $20) and register for the business tax. Rates and due dates vary widely, so you’ll need to get that information from your local clerk. More general information is available at http://www.tn.gov/revenue/tntaxes/business.shtml.
Business Personal Property Tax: In Shelby County and most Tennessee counties there is also a tax on business personal property located within the county. Personal property is defined as “the tangible and intangible property used, or held for use, in a business. It includes, but is not limited to, furniture, fixtures, vehicles, tools, machinery, equipment, raw materials, and supplies.” Note that this includes any leased equipment. Once you’ve registered your business with the county clerk, you will receive a Parcel ID and pin code from the assessor in the mail. This tax is due annually by March 1 and can be paid online at https://www.assessor.shelby.tn.us/ppo_login.aspx.
County Real Estate Taxes: The County Assessor also collects taxes based on the value of the real property you lease or own. Many restaurant owners lease their premises. It’s common under the lease for the landlord to include an estimated real estate tax collection along with CAM fees in addition to base rent. In this case the landlord will remit this to the County annually, and any difference in the estimate and actual remittance will be the responsibility of the lessee. In any event, here is the calculator: http://www.assessor.shelby.tn.us/Calculate.aspx.
Please note that while this seems like a lot of taxes, this discussion is not meant to be all-inclusive. Many federal, state and local taxes depend on the type of business you operate. For example if you are a manufacturer, lease employees or rent cars, then different rules apply to you. Your CPA can give you guidance here.