Restaurant bookkeeping comes down to four habits. Close the point of sale every day, treat tips as payroll, apply California sales tax correctly to food, and watch prime cost weekly. Get those four right and the thin margins become visible early enough to act on. Get them wrong and the books lag reality by months.
This guide is for restaurant, cafe, and bar owners in Los Angeles who want their books to match what happens at the register. You will learn how to reconcile daily sales, and what the IRS and the EDD expect on tips. You will also learn which food sales California taxes, and how to track the one number that decides whether the month was good. We keep books for LA food businesses in QuickBooks Online and Xero. So this is the routine we actually run.
Close the day, not the month
Most restaurant bookkeeping problems start with a monthly catch-up. By the time someone opens the books, the evidence is gone. The cash count, the delivery-app payout detail, and the voided ticket have all vanished. So the first rule is a daily close. It takes fifteen minutes and it prevents most of the cleanup later.
- Tie the POS report to money in. Sales by tender type (cash, card, gift card, delivery apps) should match the money for that day. That means the cash counted, the card settlement, and the delivery payouts.
- Record deposits gross, then fees. Card processors and delivery apps deposit net of fees. Booking the net amount as sales understates revenue and hides the fee. So record the gross sale and the fee separately.
- Track gift cards as a liability. A gift card sale is not revenue until it is redeemed. Many restaurant files count it twice.
- Log comps, voids, and discounts. These explain the gap between menu prices and cash, and they show where margin leaks.
Once the daily close is a habit, the month-end reconciliation becomes a check rather than an investigation.
Restaurant bookkeeping for tips
Tips are payroll, not a side channel. According to the IRS tip recordkeeping rules, employees must report cash tips of $20 or more in a month to the employer by the 10th of the following month. The employer then withholds income tax and the employee share of Social Security and Medicare on those tips. It also pays the employer share and reports the tips on the W-2.
Three details trip up LA restaurants.
- Form 8027. A “large food or beverage establishment” files Form 8027 each year. That means one where tipping is customary and more than 10 employees worked on a typical day in the prior year. If reported tips fall below 8 percent of gross receipts, the shortfall is allocated to employees.
- Tips versus service charges. A mandatory service charge or automatic gratuity is not a tip. It is revenue to the restaurant, and any amount passed to staff is wages. Voluntary tips belong to the employee under California law. Keep the two in separate accounts.
- The 2025 federal tips deduction. Starting with 2025, eligible workers can deduct qualified tips on their own returns. W-2 reporting changed to support it. That is an income tax matter for your CPA and your employees’ preparers. Your job as the employer is to report tips accurately so the numbers exist.
Our post on the 2026 payroll rules for tips and overtime goes deeper on the payroll side.
California sales tax on restaurant food
California taxes restaurant sales by what was sold and how, under CDTFA Regulation 1603. The rules that matter most:
- Hot prepared food is taxable, whether eaten in or taken out.
- Food eaten on your premises is taxable, including cold items served at your tables.
- Cold food to go is generally not taxable, unless the 80-80 rule applies. That rule applies when more than 80 percent of your receipts are from food, and more than 80 percent of your food sales are taxable. In that case, cold to-go food is taxable too, unless you separately track it and elect otherwise.
- Alcohol and carbonated drinks are always taxable.
- Optional tips are not taxable; mandatory gratuities are. A required service charge is part of taxable receipts even if you pass it to staff.
Two practical points follow. First, your POS must apply the right tax by item and by order type. The bookkeeper cannot fix at month-end what the register got wrong at the table. Second, the regulation requires a daily sales record detailed enough for an auditor to verify every exempt sale. So keep the POS reports. The CDTFA assigns your filing frequency. LA district rates differ by city, so multi-location restaurants charge by address. Our guide to California sales tax for small business covers filing.
Prime cost, the number to watch every week
Prime cost is cost of goods sold (food and beverage) plus total labor, including payroll taxes and benefits. Industry guidance such as Toast’s restaurant accounting guide puts a healthy target between 55 and 65 percent of sales. Above that, there is very little left for rent, utilities, and profit.
The bookkeeping requirement is simple but strict. You need weekly sales, weekly purchases by category, a periodic inventory count, and weekly labor from payroll. Then prime cost becomes a Monday report instead of a quarterly surprise. When it jumps, the cause is usually one of three things. Either a supplier raised prices, the schedule did not shrink with sales, or theft and waste are showing up as food cost.
A chart of accounts that fits a restaurant
Generic small business templates hide the numbers restaurants need. We set up files with these groups:
- Sales split by food, beverage, alcohol, catering, and delivery, so mix and margin are visible.
- Cost of goods sold split the same way, with purchases coded by category as bills arrive.
- Labor with separate lines for wages, payroll taxes, and benefits. Tips pass through as a liability, not an expense.
- Delivery-app commissions and card processing fees as their own expense lines.
- Comps and discounts as contra-revenue, so gross sales stay honest.
- Liabilities for sales tax payable, gift cards outstanding, and tips owed.
With this structure, the profit and loss statement reads like the restaurant runs, and the prime cost report falls out of it automatically.
The Los Angeles layer
LA adds a few items to the routine. The Los Angeles business tax renewal is based on gross receipts, so sales must be right for it too. Health permits and the alcohol license have renewal dates that belong on the bookkeeping calendar. Also, a restaurant with locations in Santa Monica, Culver City, and the city of Los Angeles carries three business licenses. It may also carry three sales tax rates. A bookkeeper who files with the CDTFA, the EDD, and the city every month keeps all of that on one calendar.
How Books LA handles this
We set up the daily close with the owner or manager. Then we connect the POS and delivery apps to QuickBooks Online or Xero, and reconcile every account to the bank each month. Tips run through payroll correctly. Sales tax is filed from POS data rather than estimates, and prime cost goes out as a weekly report. If you want to see how that would look for your restaurant, our monthly packages describe the service levels.
Frequently asked questions
How often should a restaurant reconcile its books?
Close the POS daily and reconcile bank, card, and delivery accounts at least weekly. A full month-end close then confirms what the daily work already recorded. Monthly-only reconciliation is where most restaurant books fall apart. The supporting detail disappears.
Are tips taxable income for restaurant employees?
Yes. Tips are wages for withholding and Social Security and Medicare purposes. Employees report cash tips of $20 or more per month to the employer. A new federal deduction for qualified tips applies from 2025 on the employee’s own return. That is a question for their tax preparer.
Do I charge sales tax on to-go orders in California?
Hot prepared food is taxable to go or dine in. Cold food to go is generally exempt unless your restaurant meets the 80-80 rule. In that case it is taxable unless you separately account for it. Drinks with carbonation and alcohol are always taxable.
Is an automatic gratuity taxable?
For sales tax, yes. A mandatory gratuity or service charge is part of taxable receipts under CDTFA Regulation 1603. That holds even if you pay it out to staff. A voluntary tip left by the customer is not taxable and belongs to the employee.
What is a good prime cost for a restaurant?
Between 55 and 65 percent of sales is the commonly cited healthy range. It combines food and beverage cost with total labor. Full-service restaurants tend to sit higher on labor and lower on food cost than quick-service concepts. So compare against your own trend more than a single benchmark.
Should delivery-app sales be recorded net of commission?
No. Record the gross sale as revenue and the commission as an expense. Netting them hides a cost that often runs 15 to 30 percent of the order. It also makes menu-pricing decisions harder.
What records does a restaurant need to keep for a sales tax audit?
Daily sales records detailed enough to verify all receipts and every sale claimed as exempt. Also keep POS reports, purchase invoices, and bank records. California generally expects these to be kept for at least four years. So store POS exports outside the POS system as well.
If your restaurant books are behind or do not match the register, book a short call and we will walk through the daily close together.
This post is general information. Books LA provides bookkeeping services and does not advise on income tax. We work with our clients’ CPAs on income tax matters, including the treatment of tips on individual returns. Confirm those questions with your CPA.
