Restaurants run on thin margins, high staff turnover, and a mountain of daily transactions which makes clean accounting essential and genuinely harder than most businesses. Tips, GST/HST, payroll, and food cost all have their own rules. Here’s how to keep a food business’s books (and taxes) in order in 2026.
Restaurant accounting is tough because of high transaction volume, tight margins, and tricky tip rules. The big ones to get right: whether tips are “controlled” vs “direct” (controlled tips run through payroll and attract CPP/EI; direct tips generally don’t), charging GST/HST correctly on food and service charges, tracking food and labour cost (COGS) obsessively, and syncing your POS to your bookkeeping so nothing slips. Nail these and you’ll actually see where the money goes.
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What Makes Restaurant Accounting Harder
A few realities set restaurants apart:
- Volume: hundreds of small transactions a day across cash, card, and delivery apps.
- Thin margins: small food-cost or labour errors erase profit fast.
- Tips: a whole set of payroll rules most businesses never touch.
- Perishable inventory: food spoils, so inventory and waste tracking matter.
- Complex payroll: part-timers, shift work, high turnover, stat pay.
Tips & Gratuities: Controlled vs Direct (Payroll Rules)
This trips up almost every restaurant owner. The CRA splits tips into two types, and they’re treated very differently:
| Direct tips | Controlled tips | |
| Who controls them | Paid straight from customer to employee | Employer controls/distributes them |
| Examples | Cash left on the table | Auto-gratuity, pooled tips the employer allocates, tips on card the employer redistributes |
| CPP/EI? | Generally not subject to CPP/EI | Subject to CPP/EI (run through payroll) |
| On T4? | Employee reports as income | Included in employment income |
The moment the employer controls how tips are shared, they usually become controlled tips pensionable and insurable and must go through payroll. Getting this wrong is a common source of CRA reassessments.
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Do You Charge GST/HST on Tips and Service Charges?
- Voluntary tips (the customer chooses the amount) are not subject to GST/HST.
- Mandatory service charges (e.g., an automatic 18% added for large groups) are generally part of the sale and are subject to GST/HST, because they’re a required charge, not a voluntary gratuity.
So a discretionary tip line is tax-free, but a compulsory gratuity you add to the bill usually gets taxed like the meal.
Payroll, CPP/EI and Tip Reporting
Restaurant payroll has a lot of moving parts:
- Register a CRA payroll account and remit CPP, EI, and income tax.
- Include controlled tips in pensionable/insurable earnings.
- Issue accurate T4s (with tips reported appropriately).
- Track stat holiday pay and overtime per provincial rules.
- Consider that employees can elect to make CPP contributions on direct tips via Form CPT20 some do this to boost future CPP.
Tracking Food & Labour Cost (COGS)
Your two biggest costs food and labour decide whether you’re profitable. Watch them as percentages of sales:
| Metric | Healthy target (varies) |
| Food cost % | ~28–35% of food sales |
| Labour cost % | ~25–35% of sales |
| Prime cost (food + labour) | Keep under ~60–65% |
Count inventory regularly, track waste and comps, and reconcile purchases to sales. Small leaks (over-portioning, spoilage, theft) show up here first.
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POS-to-Bookkeeping Best Practices
Your point-of-sale system is a goldmine if it’s connected to your books:
- Integrate POS with accounting software so daily sales, taxes, and tips flow through automatically.
- Reconcile daily sales to bank/card deposits and delivery-app payouts.
- Separate food sales, alcohol, GST/HST, and tips in your chart of accounts.
- Reconcile delivery apps (Uber Eats, DoorDash, SkipTheDishes) their fees and remittances get messy fast.
- Keep cash controls
Tips, payroll, and delivery-app reconciliations eating your evenings? Maxpro Financials does bookkeeping, payroll, and tax for restaurants and food businesses so your COGS, GST/HST, and T4s are handled and you can run the floor. 👉 Book a free consultation at maxprofinancials.ca.
Common Tax Mistakes Restaurants Make
- Mishandling controlled tips missing CPP/EI on employer-distributed tips.
- Charging GST/HST wrong on service charges vs voluntary tips.
- Ignoring food/labour cost % until profit vanishes.
- Not reconciling delivery apps under-reporting sales or missing fees.
- Sloppy cash handling a classic audit trigger.
- Falling behind on payroll and GST/HST remittances, interest and penalties.
- Mixing personal and business spending.
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FAQ
Are tips taxable in a Canadian restaurant?
Yes, tips are taxable income to employees. Controlled tips (employer-distributed) also attract CPP/EI and go through payroll; direct tips generally don’t.
What’s the difference between controlled and direct tips?
Direct tips go straight from customer to server (no employer control); controlled tips are managed or redistributed by the employer and are pensionable/insurable.
Do I charge GST/HST on gratuities?
No on voluntary tips; yes on mandatory service charges (like an automatic large-group gratuity), which are treated as part of the taxable sale.
What food cost percentage should I aim for?
Often around 28–35% of food sales, though it varies by concept. Keep prime cost (food + labour) under roughly 60–65%.
How should I handle delivery app sales in my books?
Reconcile each app’s sales, fees, and payouts separately their statements are complex and easy to mis-record, which distorts revenue.
Do servers pay CPP on cash tips?
Not automatically, but they can elect to contribute on direct tips using Form CPT20 to build CPP. Controlled tips already include CPP.
What payroll accounts does a restaurant need?
A CRA payroll (RP) account to remit CPP, EI, and income tax, plus annual T4 filings for staff.
Why is restaurant bookkeeping so important?
Margins are thin timely books reveal food/labour leaks, keep GST/HST and payroll compliant, and prevent small errors from wiping out profit.