How to Accrue Your Business Insurance Expense Over 12 Months

If you are like most companies, you will pay a large down payment followed by nine equal monthly installments to cover your yearly Insurance Premiums (General Liability, Liquor Liability, Property, Workers Comp, etc.) Booking these insurance expenses into your accounting system as you pay them will give you inaccurate financial reporting if you use the “accrual” method, which is what we would advise any restaurant or bar to use.

For example, if your general liability insurance premium is $12,000 for the year, then let’s say you have a down payment around $3,600 and then 9 monthly payments of $933.33. As you can see, this only ends up being 10 total payments and instead, you want your P&L to show twelve equal monthly $1,000 insurance payments.

In order to set this up correctly in your accounting system, you will need three accounts:
1. Pre-Paid Insurance (Current Asset account type)
2. Insurance Payable (Current Liability account type)
3. Insurance Expense (Expense account type)

Do a journal entry debiting the Pre-Paid Insurance account and crediting the Insurance Payable account for $12,000. Then set up 12 recurring journal entries debiting Insurance Expense and crediting Pre-Paid Insurance for $1,000 and this will bring the Pre-Paid Insurance account back to zero by the end of that 12 month period. Make all actual insurance payments, including the down payment, out of the Insurance Payable account which will decrease that liability account back down to zero once all the payments have been made. By the end of this process you will have 12 equal monthly insurance expenses of $1,000 each and both the Pre-Paid Insurance and Insurance Payable accounts will be zeroed out.

The insurance accrual can definitely get a lot more complicated if you want to track GL, Liquor Liability, Property and finance charges for Insurance expenses separately, but I wanted to give the most basic example so that anyone could follow the logic easily.

JK Bookkeepers

Is Bottle Service Taxable in Bars?

Many bars and nightclubs offer “Bottle Service” as a way of increasing revenue by catering to more upscale clientele, but what are the tax implications?  To answer this question we first need to identify products and services included in Bottle Service.  Usually this service encompasses bottles of alcoholic beverages, a reserved table, mixers for drinks and a personal cocktail server.  Next, we need to verify the different tax impositions on each type of item sold in a bar or nightclub.

In Texas, there is a mixed beverage gross receipts tax of 6.7% (used to be 14%) imposed on the total dollar amount received for the sale, service and or preparation of alcoholic beverages.  There is also an additional 8.25% (as of January 1, 2014) mixed beverage sales tax on the same sales noted above but this tax can be passed off to the customer at the time of sale or the bar can keep it inclusive.  Most other sales such as non alcoholic beverages and merchandise are still subject to the standard 8.25% sales and use tax.

According to the Texas Comptroller in their February 2009 Tax Policy News Update,

            -If the reserved table is a separate charge on the customer’s receipt from the alcohol and mixers, then the sale from the reserved table is not subject to the mixed beverage gross receipts tax nor is it subject to mixed beverage sales tax, unless the two purchases are dependent on each other. All other alcohol related charges on the receipt will be subject to the standard mixed beverage taxes.

            -If you can only purchase a bottle by also paying for a reserved table, then the full amount of the combined sale is subject to both mixed beverage gross receipts tax and mixed beverage sales tax.

            -A lump sum, or combined charge, that includes the reserved table, the bottle of alcohol and all related services is subject to both mixed beverage gross receipts tax and mixed beverage sales tax.

            -If the reserved table is a separately stated charge and not subject to mixed beverage taxes, it may still be subject to sales and use tax only when the bar sells prepared food and the charge for the reserved table is made in connection with the meal sold.

Every state has different tax codes, so make sure you check what the specific tax laws and rules are in your state regarding Bottle Service in order to be fully compliant.  Finding a good bookkeeper who knows your state tax codes can really help as well.

Tips Vs. Service Charges In 2014

FICA Reporting Compliance related to Rev. Rul. 2012-18 will become effective January 1, 2014.  This ruling provides guidance on determining the difference between tips and service charges.  Most restaurants have both tips and service charges, but many restaurants just add in service charges to the tip amounts through payroll.  Since tips are eligible for the FICA Tip Credit, the IRS has determined that Service Charges are different and deserve to be taxed as “wages” instead.  Since wages are taxed differently than tips, service charges would need to be taxed differently as well.

Tips, under the IRS rules, usually have the following four components:

1. The payment must be made free from compulsion.
2. The customer must have the unrestricted right to determine the amount.
3. The payment should not be the subject of negotiation or dictated by employer policy.
4. The customer has the right to determine who receives the payment.

If any of these four aspects is missing, then the payment could be perceived as a service charge and not a tip.  Service charges are usually pre-determined amounts added to a customer’s check for a variety of reasons.  A few examples of service charges are “automatic gratuities” and “event fees” that are passed on to the server to keep.  Automatic gratuities are usually percentages determined by ownership or management for large parties of 6 or more people at one table or in a group being served together, which is added on to the check at the end of the meal.  The customer usually doesn’t have the option to choose their own amount when these auto gratuities are added on to the check, although sometimes, the customer ends up leaving additional money and that amount can be defined as a tip.  Event Fees or Room Fees that are added on to a customer’s check and then passed on to the server are also considered service charges and need to be taxed differently from tips.

As of now, many restaurants can distinguish between credit card tips and service charges on a “Time and Attendance Report” or “Payroll Report” derived from the POS systems.  Most restaurants probably do not have a separate earnings code (and matching deduction code) for service charges within their payroll system and thankfully, there is a very simple solution.  Just add a new earnings code and matching deduction code to your payroll company file.  Things become a little trickier depending on how a restaurant pays out tips and service charges to its employees.  Here are a few examples of tip payment methods and how to report service charges and tips correctly, following that same method.

1.  All tips and service charges are paid out in cash at the end of each shift – An employee worked 74 hours @ 2.13 (assuming no overtime,) received $850 in tips and $45 in automatic gratuities:

Earning Codes	Hours	Payrate	Gross Earnings
Server	74.00	2.13	157.62
Tips (In)			850.00
Service Charge (In)			45.00
				1052.62	Total Earn
Deduction Codes
Tips (Out)			850.00
Service Charge (Out)			45.00
				895.00	Total   Ded

 

2.  All credit card tips and service charges are paid through payroll and cash tips are taken home at the end of each shift – An employee worked 65 hours (assuming no overtime,) received $575 in credit card tips, $15 in automatic gratuities and $115 in cash tips (you must have a way to allow servers to claim cash tips separately from credit card tips in the POS system):

Earning Codes	Hours	Payrate	Gross Earnings
Server	65.00	2.13	138.45
CC Tips			575.00
Service Charge			15.00
Cash Tips (In)			115.00
				728.45	Total Earn
Deduction Codes
Cash Tips (Out)			115.00
				115.00	Total   Ded

 

If your company is hand entering hours and tips, a few additional earning and deduction codes are all that’s required, but if your company pulls export files from a POS system and then imports those files into a third party payroll company file, then more customization will be needed.  The export and or import files may need to be reconfigured by either your POS or payroll company.  Contacting both companies and asking them what steps are necessary to add or change the way service charges are reported through the export/import process would be a really good start.

Please make sure you are reporting all tip and service charge earnings correctly through your payroll as of January 1,2014 and remember to always file IRS Form 8027 (if you have more than 10 employees) by February 28^th or April 1^st (if electronically filing) of the following year for the prior year.  If you have more questions about the difference between tips and service charges, contact your CPA and payroll company.  Look for my next blog for more information on the FICA Tip Credit.

 

JK Bookkeepers

Update From the DOL on Exchange Notices for Employees (Sept. 11, 2013)

The Department of Labor just released an “FAQ on Exchange Notice Penalties” yesterday Sept. 11, 2013 stating that there will be “NO fine or penalty under the law for failing to provide the notice.”

As a quick follow up to our previous post, employers are still required to provide written notice to employees about the Health Insurance Marketplace by October 1, 2013 if covered by the Fair Labor Standards Act, but there will be no fine or penalty for not doing so.  This definitely provides some relief for most employers, however, employees (whether they realize it or not) are still counting on employers to provide the proper information about their health care options for 2014.  Remember, almost all individuals are still on the hook for finding health care coverage, otherwise they will pay a penalty.

Click here for more information from the DOL and to download a Model Notice for employers.

JK Bookkeepers

A Few Important ACA Facts

Did you know?

• Individuals are still required to obtain health coverage starting Jan. 1, 2014, or face penalties.
• Employee-notification rules still take effect Oct.1, 2013, requiring all employers covered by the Fair Labor Standards Act to provide employees with written notice about the new state exchanges. (If you have $500,000 or more per year in sales or receipts, then you are governed by the FLSA) If you are unsure about whether or not you must comply with the FLSA, please visit the Department of Labor website and use the FLSA Advisor tool to determine your status.
• The Department of Labor website also has a sample cover letter and model exchange notice for you to use if you don’t have one ready. You must be able to show that your employees have received this notice and the best way to do that is really up to each individual business owner, but keep good documentation to support your efforts.
• Even if you have less than 50 full time employees, this deadline still applies to you if you are governed by the FLSA!
• The law requires almost all Americans to obtain “minimum essential coverage” starting in 2014. Tax penalties for individuals who fail to obtain coverage for 2014 start at $95 a year, or 1 percent of a person’s taxable income, whichever is greater.
• In 2015, the penalty goes up to $325 per adult and $162.50 per child with a maximum of up to $975 for a family, or 2 percent of family income, whichever is greater. In 2016, the penalty will be $695 per adult and $347.50 per child with a maximum of $2,085 for a family, or 2.5 percent of family income, whichever is greater.
• If you are part of a business that has multiple entities and/or multiple partners, you may need to consider your employees as one group for the purposes of the requirements of the health care law. This could push you over the 50-FTE employee threshold. The IRS will apply its longstanding common control standard of who is the employer — found at Internal Revenue Code § 414(b), (c), (m) and (o) — in these situations. Under this standard, companies that have a common owner or are otherwise related sometimes must be considered as one employer for purposes of determining whether or not they employ at least 50 full-time-equivalent employees. If the combined total meets the 50-FTE threshold, then each commonly controlled entity must comply with the law’s employer mandate, even companies that individually do not employ enough employees to meet the threshold. Each entity is called an “applicable large employer member” subject to the employer mandate.
• Contact your Tax Attorney or CPA for more information on multiple entity ownership and how you could be effected by ACA.

Need more information? Visit The National Restaurant Association’s Healthcare website.

JK Bookkeepers

Entering Daily Sales for Your Restaurant & Bar Correctly into QuickBooks Online

One of the first things I see when taking on a new restaurant or bar client is that they are using the deposits window to enter in cash and credit cards and then assigning sales through those deposits.   The difficulty here is that you cannot get your sales entered accurately through deposits, and if you can get all sales in correctly, then your deposit amount will include all cash and credit cards received that day which means you can’t match up different payment type deposits in your bank account.  What you really want for each daily sales entry is a “Sales Receipt” and each corresponding “Item” will report to a different account.  The “Sales Receipt” is located under “Customers” -> “Sales Receipt.”  Before you can use the sales receipt, you will need to set up all the items that will be used each day and you would want them to reflect your Daily Sales Report or End of Day report from your POS System.

To set up your first item, go to “Customers” -> “More” -> “Products and Services List.”  Once you are there, choose the blue “New” tab at the bottom right hand corner of the screen. You will then type in the name of your first item, “Food” (we will choose Food since it is usually everyone’s first sales category on the daily sales report from your POS System.)  You will not need a description unless you want a more detailed explanation for that item.  I like to use descriptions for my payment items so that they will show up on the bank register.  You also will not need to attach a price/rate, so leave that part blank as well.  Once you get down to “Income Account,” choose the appropriate account from your chart of accounts that your food sales should report to.  Most restaurants have a “Food” sales account so that would be the likely option.  Keep going down your daily sales report from your POS System creating new items for all sales categories, comps & discounts, paid outs/paid ins, gift card sales/redemptions and all payment types.  The “Income Account” you are assigning to that item does not have to be an income account; for payments you would likely choose your bank account, for gift cards, you would likely choose a current liability account and for paid outs, you would likely choose coordinating expense accounts, depending on what the paid outs are for.  I usually suggest setting up a single item for all Visa, Mastercard & Discover payments and then a separate item for American Express payments and let your cash payments go into “Undeposited Funds.”  Many restaurants and bars aren’t great about separating cash deposits out by day, although it helps to do so in order to match deposits more easily in the bank account.

Once you have all of your items set up, you can then move on to setting up your “Sales Receipt.”  Go to “Customers” -> “Sales Receipt,” type in “Daily Sales” for your customer and tab down to the 1^st line of the sales receipt.  Here you can choose your items and I would suggest keeping them in the same order that your Daily Sales report from your POS System has top to bottom for an easier data entry process.  Leave the amounts blank and fill in all the line items you have.  You can add more lines by clicking the “more lines” tab in the bottom left corner under all your items.

Once you have all of your items in, you can choose to memorize the template at the bottom right of the page by clicking the “Make Recurring” blue button.  Now you can name the template “Daily Sales” and change the template type to unscheduled, then choose “Save Template.”  Now you can always go back to this template to enter your daily sales and you will only need to change the date and fill in all your sales and payments for each day.  To locate this template in the future, you will need to go to “Company” -> “Recurring Transaction,” click on the one that says “Daily Sales” and then click on the blue “Use” button.

Here is a simple example of what a daily sales template can look like:

Now all of your sales will be reporting to proper income accounts, payments will be reporting to the bank account, sales tax will report to your sales tax payable account, etc….  Your cash will be the remaining amount due at the bottom and will go into your “Undeposited Funds” account which you can access through “Banking” -> “Deposits.”  Here you can deposit those cash amounts individually or combine them in order to match up to your actual bank deposits.  Always remember to enter sales, sales tax and paid ins as positive numbers and then enter all payments, discounts and paid outs as negative numbers!

Some restaurants and bars may have a more extensive sales receipt depending on how many sales categories there are, whether you want Comps & Discounts split out to show specifically what types of discounts are occurring and all the paid outs running through the POS System, but this basic example should help to get you started.

Having a good sales receipt is imperative for two reasons, easily matching your deposits through the “Downloaded Transactions” under “Banking” in your QB Online file and getting all sales entered correctly on the proper business date when they actually occurred.  If you have any questions let us know and we can help you through the process.

JK Bookkeepers

Focusing Managers on the Right Numbers

 

I see it time and time again…. When managers are given a full P&L for review, they more often than not, start focusing on the wrong numbers. These are some common areas of distraction for some managers:

– Credit Card Processing Fees/Merchant Fees
– Payroll Taxes
– Insurance
– Rent
– Licenses & Fees
– Advertising/Promotion

These expenses are often large numbers and difficult for a manager to ignore if their bottom line is not what their owner is expecting or wanting. Managers have very little (if any) control over many general operational expenses in a restaurant or bar and have a hard time setting these numbers aside to focus on their immediate controllables. I find that managers gravitate to those numbers instead of the ones they should be looking at like:

– Food Cost
– Liquor Cost
– Beer Cost
– Wine Cost
– Labor Cost
– Paper, Supply & Smallwares (Bugdets & Expenses)

It is very important to keep your manager focused on your biggest controllable items and set appropriate goals for them to achieve on a monthly and quarterly basis. Do not let them waste time digging through expenses that are fixed or unlikely to change in the near future. I’ve seen managers spend hours upon hours rifling through expenses they can’t change, while they ignore a 52% food cost. Sometimes a full P&L can be very overwhelming for a manager, especially a new manager, and offering a more condensed P&L or a Prime Cost Detail (COGS & Labor breakdown,) only showing the items that your manager has control over, can be more beneficial in structuring their time. Managing a restaurant or bar involves so many moving parts, so help your managers become more successful and effective by giving them the right numbers at the end of each month. You’ll see immediate action and less time wasted.

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Stopping Ex-Employee Fraud in Your Restaurant/Bar

It pains me to say this, but not every employee is the model of trustworthiness, loyalty and virtue we may want to believe they are.  I heard a story about a bar recently where an ex-employee (manager,) over time, had been logging in remotely to the bar’s back office point of sale computer and refunding his own credit card through the credit card processing software and then deleting each credit card batch afterwards. He or she was able to steal thousands of dollars over a few years before someone from the bar noticed something was wrong.  We can all learn a few lessons from this bar’s misfortune and I’ll explain why….

1.  Every restaurant and or bar should have someone entering daily sales information into an accounting system (using the “accrual method”) and each daily entry should be balanced against the corresponding deposits.  When the deposits don’t match, then something is wrong!  If the bar had been reconciling their daily sales against their deposits, someone would have or should have noticed the problem and began an investigation into the missing funds.  This problem would have taken longer to surface if the bar was using a “cash basis” accounting method, which is never a good idea from an internal controls perspective.  Using the “cash method” means sales are entered based on the day funds are received and most people don’t use balancing procedures to make sure deposits are matching payments received from their POS Systems.  A good bookkeeper would have caught this problem after just a few days, either way.

2.  Someone should always change passwords and remove access levels to all company systems for each employee upon termination.  There is no reason the ex-employee from the bar mentioned above, should have been able to log into any company system for such a long period of time.  Development of proper HR procedures for terminations would have saved this company a lot of money and heartache.  Managers have much higher access into systems within any company, so specific procedures need to be developed and followed during any management termination to avoid potential future theft.

There are many other ways employees can steal from your bar or restaurant but actively maintaining a structure of policies and procedures to protect you against fraud can substantially decrease potential loss.  Unless you want to be the next victim of theft by ex-employee, please learn these lessons from other’s costly mistakes:

                Hire a great bookkeeper (preferably with restaurant & bar experience.)

                &

                Develop and follow protective HR procedures for employee terminations.

 

A little food for thought from JK Bookkeepers……..

Are You Paying Your Restaurant & Bar Employees Correctly?

Dealing with tipped employees makes for some added due diligence on the part each employer to process a payroll correctly.  Here in Texas, you may take a tip credit on any employee receiving and claiming their tips in the service industry.  Usually, servers and bartenders make $2.13 per hour after a $5.12 tip credit has been taken.  Here are a few questions to ask yourself when paying a tipped employee:

1. Do you know what the correct overtime pay rate is for your tipped employees?  The correct overtime pay rate for a tipped employee is $7.25 x (1.5) = $10.87* then subtract the tip credit $10.87 – $5.12 = $5.75*.   So, $5.75* is the overtime pay rate for a tipped employee in Texas when the regular rate is $2.13.

2. What happens when the server or bartender does not earn enough money in tips to meet the state’s minimum wage requirement?  In Texas, if your employee does not earn enough money in tips to meet the minimum wage requirement of $7.25, then the employer must make up the difference and this is called a “tip makeup.”  For example if an employee works for 10 hours in one week at $2.13 per hour and has $50.00 in tips, they will get $2.13 x 10 = $21.13 then you add their tips to get $71.13.  Minimum wage for 10 hours worked = $72.50, so now the employer must make up the difference of $72.50-$71.13 = $1.37.  This happens far more often than employers realize but most outsourced payroll companies will offer a way to track this for you if you ask for it.

3. How are you claiming employees’ credit card and cash tips and how are they receiving those tips?  More and more restaurants are switching to paying out credit card tips on employee paychecks.  If this is your procedure, then make sure to still claim cash tips as a separate earning and matching deduction in order to tax the employee properly for all earnings.

4. Are you paying “time and a half” for overtime or “half time” as your overtime premium?  So many restaurants and bars here in Texas pay overtime at “time and a half” when actually your overtime premium should be “half time.”  Let’s take an example of an employee who worked 42 hours in week 1 and 37.5 hours in week 2 of a bi-weekly payroll.  Since the overtime law in Texas requires an “overtime premium” to be paid after 40 hours in a work week, most employers would pay this employee 77.5 hours at regular pay and 2 hours at “time and a half” pay.  This is actually incorrect, although the employee still receives the correct amount of money.  To pay this employee correctly, the employer should pay 79.5 hours at regular pay and then add 2 hours at “half time,” which is the overtime premium.  Here are the examples:

Incorrect: 77.5 hours at the regular rate of $2.13 + 2 hours of “time and a half” at $5.75.

(77.5 x 2.13)=165.08 then add (2 x 5.75) = 11.50 -> 165.08 + 11.50 = 176.58

Correct: 79.5 hours at regular pay rate $2.13 + 2 hours of “half time” premium at $3.62*

(79.5 x 2.13) = 169.34 then add (2 x 3.62) = 7.24 -> 169.34 + 7.24 = 176.58

As you can see, the employee receives the same amount of compensation either way, but if the employer tracks overtime separately from regular time, financially, they would not see a clear picture of how exactly overtime affects their business.  Presumably, the employer would have needed an employee to work those 2 hours that accrued overtime, but if they were worked by another employee that did not go into overtime, then the employer would have paid that regular rate for the same 2 hours worked.  With the above example, the effect of overtime was actually $7.24, not $11.50.

Payroll can be a pretty tricky task, so just make sure whoever is processing your payroll is either a Certified Payroll Professional, or has at least gone to numerous training and informational seminars within your state(s.)  A little restaurant or bar payroll experience wouldn’t hurt either…….

*Some variance occurs due to individual rounding procedures.

JK Bookkeeping Solutions

Are You Tracking Gift Cards Correctly?

More and more restaurants are hopping on the gift card train to take advantage of some of the benefits like increased sales, a boost in cash flow, higher profits and larger marketing opportunities. Gift Card programs have grown to new heights of complexity in recent years so it’s very important to set yours up correctly from the start (or clean up your current tracking system sooner rather than later.)  For starters, did you know that gift cards can be used for different types of business transactions?  You can sell gift cards to customers (the traditional use of a gift card,) you can trade gift cards with other businesses, you can give gift cards as donations, you can track employee meals with gift cards, you can use gift cards to budget your comps and discounts and use gift cards for your secret shoppers.  There are definitely a few more uses out there, but I will stick with the most popular ones mentioned above.

First things first, make sure your gift card program has the proper reporting capabilities to track all of the different types of gift card uses you desire.  Many restaurants are using only one type of gift card for many different purposes which makes tracking a nightmare.  If you want different uses for your gift cards, then set up each type of gift card on a unique number series which can then be tracked separately.  If you have multiple locations, make sure your gift card program can report on a multi unit or franchise platform.

Next, make sure you have a liability account set up for your Gift Cards to run through.  When your customers purchase a gift card from you, the transaction is not recorded as revenue yet.  It needs to go into your Gift Card Liability account and wait there until it is redeemed (kind of like any other deposit or prepayment.)  Upon redemption, the revenue will be recognized through the food and beverages sold and then removed from liability.  You are allowed to defer income recognition until the gift card is redeemed and income is recognized in revenue.  However, Internal Revenue Bulletin 2011-5 states that after the second year following the purchase of any unredeemed gift card, the income must be recognized and reported.  Many Gift Card Programs out there do not have good enough reporting to give you searchable date range options when looking up your unredeemed gift cards, which means finding that amount of income to recognize/report could be nearly impossible.  Do your due diligence when choosing a gift card program and make sure you get the necessary reporting.

Using gift cards for donations, trades, promotions, employee meals, etc. is a fantastic idea but can also get complicated quickly if you aren’t set up correctly.  For each of these cards, you need to have a way to add value to the card without ringing it through the POS system and comping it off.  The true donation, promotion or employee meal expense occurs when the redemption occurs, not when the value is added to this type of special gift card.  Upon redemption of these special gift cards, your Gift Card Liability account is used the same way a normal gift card redemption transaction uses it, but then the proper business expense still needs to be recognized to offset your Gift Card Liability account.  Comprehensive gift card reporting from your program provider will allow you to do accurate monthly allocations from your Gift Card Liability account to the proper expense accounts with these types of gift cards.  Also, make sure your bookkeeper has experience with these types of gift card programs to avoid an even bigger mess.

A final note about your gift card program: Please make sure you have a proper control system in place for your gift cards in order to reduce potential employee theft.  I guarantee you will lose money on any gift cards you can’t track properly.  Only allow employees to sell and redeem gift cards.  Do not ever give them voiding, comping or discounting privileges with your gift cards!

Hopefully this helped a little on your quest for gift card nirvana…..

JK Bookkeeping Solutions