Taxes were probably the last thing on your mind when you first thought about starting a food truck. But every time your famous Truffle Mac & Cheese Pizza turns a profit, Uncle Sam will want his slice. While your customers dig into your culinary creations, let’s dig into making a tax plan for your food truck business.
Business entities and income tax
Your business entity will determine when and how you’ll be required to file and pay income tax. Which one should you choose?
Many new business owners choose to operate as sole proprietors until they get their feet wet and prove they have a viable business concept on their hands. But a sole proprietorship also has its drawbacks — namely that your business is not legally protected. Should you face a lawsuit or find yourself in debt to a creditor, your personal assets, such as your house or savings, are on the line. Ouch!
Running your business as a sole proprietorship means you don’t have to file any incorporation paperwork or deal with other legal hassles.
If you’re starting a food truck as a sole proprietor, you will still file your personal 1040 income tax form every year by April 15. But to this filing you will be required to add on Schedule C “Profit and Loss from Business” and Schedule SE “Self-Employment Tax.”
Depending on your profits, you might also be required to make quarterly estimated tax payments. Quarterly estimated taxes are due when you expect to owe the government more than $1,000 in taxes at the end of the year once you have claimed all your credits and deductions.
To pay quarterly estimated taxes, estimate your entire tax liability for the year and divide that number by four. Then pay the IRS quarterly by the due dates of April 15, June 15, September 15 and January 15.
For example, if you estimate you will owe $10,000 in federal income tax at the end of the year, then pay $2,500 quarterly.
Limited liability company (LLC)
LLCs are wildly popular with small businesses for a reason: they limit your personal liability as a business owner, but present only a fraction of the legal and tax headache that comes with running a corporation.
In general, how you file and pay income tax as an LLC is very similar to filing and paying as a sole proprietorship. You’d still be required to file a Schedule C and Schedule SE along with your personal 1040 income tax form by April 15. Also like a sole proprietor, you might be liable to pay quarterly estimated taxes four times throughout the year.
Editor’s note: Make tax time easier with GoDaddy Online Bookkeeping. Designed for sole proprietor or LLC businesses, it serves up a Schedule C worksheet all filled in. Just hand it to your accountant or plug the numbers into your tax software.
Conquering the food truck park with friends? Choosing a partnership business entity can be as simple as sharing the profits and losses with one or more people (similar to a joint sole proprietorship). Or it could be as formal as setting up a Limited Liability Partnership (like a joint LLC).
Depending on the type of partnership you choose, your tax obligations can get a bit more complicated. While filing income tax can be similar to that of LLCs and sole proprietors, you’ll also likely be required to file IRS form 1065, “U.S. Return of Partnership Income,” and provide copies of Schedule K-1 to each member of the partnership.
Other business entity types
The business entity that works when starting a food truck might not work later on. As your business grows and you start making megabucks or accumulating valuable assets, then you might want to transition to another entity, such as an S-Corporation or C-Corporation. In both cases, your corporation has shareholders who are shielded from liability.
The downside? Your taxes will become more complicated. For example, you might be required to file Form 1120, the “U.S. Corporations Income Tax Return,” or you could be required to file your annual income tax by March 15 rather than April 15.
Pro tip: Always speak to a tax professional to maximize your profits while protecting yourself and your business.
State and local tax
Of course, the IRS doesn’t run the only tax game in town. You might also be on the hook to deal with state and local tax.
State income tax
Your state likely subjects business owners to income tax, too. If you are a sole proprietor or LLC, chances are you’ll file and pay state income tax on business income, along with your personal income tax filing. However, some states — especially those like Texas with no personal income tax — might subject your business to a separate business income tax. This tax is sometimes called different names such as “franchise tax” or “gross receipts tax.” You as the business owner are responsible for filing and paying this tax on your business income.
You can find out more about state income tax requirements by speaking with an accountant or contacting your state’s taxing authority (usually called the “[State] Department of Revenue”).
You could also be required to charge a sales tax on each sale you make through your food truck’s window. Sales tax is a percentage of each transaction that you collect from your customers and then pay periodically back to your state. To collect sales tax, you must first register for a sales tax permit with your state’s department of revenue.
If your food truck is mobile, you might be required to charge different sales tax rates at the different locations where you set up shop for the day. You’ll want to remember to set your point of sale software to collect the right amount of sales tax at each of your food truck’s stops.
You can read more on what food truck owners need to know about sales tax here.
Starting a food truck — beyond the taxes
Food trucks are also subject to local licensing and permitting requirements. You might be required to obtain a business license, a health permit and any number of other permits. To find out more about the documents you’ll need to get up and running legally, contact your Secretary of State’s office. They can point you toward any statewide requirements, as well as local governments you need to speak with.
Starting a food truck business is best done with your eyes wide open. Knowing about your tax obligations will prevent surprises come April. Good luck out there on the road!
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific situation.