Most restaurants don't fail because the food is bad. They fail because the owner finds out too late that the numbers stopped working: food costs crept up, labor ran heavy for three months, or the cash in the drawer never quite matched the POS. Restaurant margins are thin, often only a few cents on every dollar of sales, so the difference between a good year and a bad one is usually hiding in the books. Here are the numbers that matter and the bookkeeping habits that keep them visible.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
Prime Cost: The One Number to Watch Every Week
Prime cost is your cost of goods sold (food and beverage) plus your total labor cost, including payroll taxes and benefits, divided by total sales. It is the single most useful number in a restaurant because it covers the two biggest costs you can actually control.
Industry guidance generally puts a healthy prime cost at roughly 60–65% of sales for full-service restaurants, and a little lower for quick-service. Once prime cost climbs much past 65%, there is very little left for rent, utilities, insurance, and profit. Food and labor also trade off against each other: a steakhouse with a high food cost can still be healthy if its labor runs lean, and the reverse is true for a labor-heavy concept. Set a target for your concept, then track it weekly, not just at year-end. A problem caught in week two costs far less than one found in the annual tax return.
Food Cost Only Means Something With Real Inventory Counts
Many restaurants record every food invoice as an expense the day it's paid. That keeps the books simple, but it makes food cost swing wildly from month to month depending on when deliveries land. The accurate formula is beginning inventory + purchases − ending inventory = cost of goods sold, which means someone has to count the walk-in and dry storage on a regular schedule, ideally the same day each week or month.
Break food and beverage into separate cost categories, and split beverage into beer, wine, and liquor if you serve alcohol. Each has a very different margin, and a single combined number hides where the leak is.
Reconcile Sales to Deposits Every Day
Your POS report, your credit card processor deposits, your third-party delivery payouts, and your cash drops should all tie out. In practice they often don't: processor fees are netted out of deposits, delivery apps pay weeks later after deducting commissions, and comps, voids, and gift cards complicate the totals. Record gross sales and record the fees as expenses, rather than booking the net deposit as revenue. Otherwise you understate both sales and costs, and your sales tax reporting may not match your books.
Tips Are a Payroll and Tax Issue, Not Just a Cash Issue
Tips create real compliance work. Employees must report tips to the employer, and the employer withholds and pays payroll taxes on reported tips. Larger establishments where tipping is customary, generally those that normally have more than 10 employees on a typical business day, must also file Form 8027, the annual information return for tip income, and may have to allocate tips if reported tips fall below 8% of gross receipts.
There is an upside, too. The FICA tip credit (claimed on Form 8846) lets many food and beverage employers recover the employer share of Social Security and Medicare tax paid on certain tips. It is one of the most commonly missed credits in the industry. Note that mandatory service charges and automatic gratuities are treated as wages, not tips, so they don't qualify. For the newer federal reporting rules on tips, see our guide to the 2026 payroll reporting changes for tips and overtime.
Massachusetts Specifics: Meals Tax and Tipped Wages
Massachusetts charges a 6.25% sales tax on meals, and cities and towns can add a local-option meals tax of up to 0.75%, so most diners in towns that adopted it pay 7%. The local portion must be separately stated on receipts, and the rate depends on where the restaurant is located, so set up your POS correctly for each location. Massachusetts also has its own minimum wage and tipped-employee "service rate," which are higher than the federal amounts and change through state law, so confirm your payroll setup against the current Massachusetts figures each January.
Close the Month the Same Way Every Month
A consistent monthly close turns these pieces into decisions. At minimum: reconcile every bank and credit card account, record the inventory count, record accrued payroll for days worked but not yet paid, and review a P&L that shows food cost, beverage cost, labor, and prime cost as percentages of sales. If you run more than one location, produce a P&L by location; a strong restaurant can easily hide a struggling one in a combined report. If you need a refresher on reading those statements, start with how to read your P&L and balance sheet.
How VarStan Helps
VarStan is a CPA-led firm based in Needham, Massachusetts, and restaurants are one of the industries we know best. We reconcile your POS, processor, and delivery-app deposits, track food, beverage, and labor costs against your targets, keep tip reporting and the FICA tip credit on track, and deliver a clean monthly P&L with prime cost front and center. Learn more about our bookkeeping services for restaurants, or see your monthly price in 60 seconds.
Related reading: Deducting Startup Costs: What New Businesses Can Write Off and The Self-Employed Health Insurance Deduction Explained.