A Complete Guide to Restaurant Payroll

You can’t run a restaurant without employees, which means processing restaurant payroll is an integral part of running a food service business.

However, restaurant payroll can also be one of the most challenging responsibilities for restaurateurs because there are several industry-specific laws related to employee scheduling and tipped wages that need to be taken into consideration. This means that it’s essential to familiarize yourself with the basic payroll concepts and regulations in order to avoid costly errors.

The purpose of this guide is to enable restaurateurs to navigate the logistical and legal challenges of restaurant payroll with finesse by learning:

• What is restaurant payroll?
• How to set up payroll for restaurants
• How to create a payment schedule for your restaurant
• Rules and regulations for tipped employees
• The basics of payroll tax
• How to choose the right restaurant payroll software

Let’s dive in!

What is Restaurant Payroll?

Restaurant payroll is the total compensation a restaurant business must pay to its employees over a set period of time. In short, it’s the act of calculating and distributing wages to restaurant employees.

As you can imagine, payroll is a pretty important part of restaurant management and there is a lot of responsibility attached to proper compliance, including:

• The timely and accurate payment of employees
• Avoidance of fees, fines, and legal troubles
• Proper calculation of taxes
• Maintaining an accurate record of employee earnings

With so much on the line, it’s important to dedicate the proper time and resources to making sure your business is following the appropriate payroll rules and regulations.

How to Set Up Payroll for your Restaurant

Now that you’re familiar with the basics of payroll for restaurants, it’s important to familiarize yourself with some important requirements that must be met before you can actually start processing payroll.

To help you set up payroll for your restaurant, we’ve listed all the important restaurant payroll requirements and considerations below:

An Employee Identification Number (EIN)

First things first, you’ll need an Employee Identification Number (EIN). An EIN will serve as your business’s tax identification number during the process of filing taxes for your business. It’s also your unique identifier for any paperwork involving the IRS, Social Security Administration (SSA), and Department of Labor (DOL).

You can apply for an EIN online here using the government-provided Form SS-4.

You will also need ID numbers for the state, territory, or district in which your restaurant is running. Check each state’s department of labor and department of revenue for further details on business registration.

A payroll bank account

Next, you will need a payroll bank account. This is a separate checking account exclusively used to pay employees.

Running a restaurant involves many expenses which may quickly deplete your business bank account funds. Therefore, it’s important to have a separate account with adequate funds at all times for paying employees at the end of the payroll period. It also simplifies the restaurant bookkeeping process.

Accurate Employee Information

In the U.S., every employee is required by law to complete a Form W-4, which will help you calculate how much federal tax you must withhold from their paychecks.

The law also requires both the employer and employees to properly complete a Form I-9 to verify the identity and employment authorization of any individual hired for employment in the restaurant.

You should also verify that each employee’s social security number is valid to prevent errors while reporting employee information to entities like the IRS.

Finally, it’s advisable to acquire a Form W-9 from every contractor hired by the restaurant in order to get their relevant tax and identification information as required by the IRS.

After you have verified that all the required paperwork is in place, there are a few more things you must take into consideration before you begin your restaurant payroll process, starting with restaurant minimum wage and tipped minimum wage requirements.

Minimum pay versus tipped wage

Federal law requires employers to pay tipped employees a tipped minimum wage of $2.13 per hour. This differs from the federal minimum wage for untipped employees, which is $7.25 per hour. This is because federal law allows employers to take a tip credit from their tipped employees. A tip credit is the maximum portion of the minimum wage that an employer isn’t required to pay a tipped employee.

This means since the federal minimum wage is $7.25 and the federal tipped minimum wage is $2.13, the tip credit is the difference between the minimum wage and the tipped minimum wage: $5.12 per hour.

With that said, it’s important to note that minimum wage requirements for tipped employees vary across states. In some states like California and Oregon, the employer cannot claim a tip credit. An employer who fails to provide tipped employees with the prerequisite information for claiming tip credit according to section 3(m) of the FLSA foregoes the tip credit and must pay the employee the full federal minimum wage while allowing them to keep all tips received.

Overtime pay

Once you’ve sorted out wages, another one of the big restaurant payroll costs to consider is overtime pay.

There are federal provisions for tipped employees who work overtime, requiring overtime pay for hours worked over 40 per workweek, at a rate not less than one and a half times the regular rate of pay.

Tip reporting

Unless employees earn less than $20 in tips in a month, the Internal Revenue Code requires them to report all tips to their employer, as all tips are income and therefore subject to Federal income taxes.

You must report the total tips submitted by your employees for the payroll period, as well as their work hours and hourly rates to the IRS. This information will also appear on your Employers Quarterly Payroll Tax Return form.

Multiple pay rates

Restaurant employees often have more than one role to fill. For example, an employee can earn one hourly rate while working as a server, and a different rate while working as a hostess. And with multiple roles come multiple pay rates.

When running restaurant payroll manually, you should meticulously keep track of every employee’s pay rate and work hours in all their different capacities. Some restaurant payroll services can accommodate employees with multiple rates, but be sure to ask your potential payroll provider if their system is compatible with multiple pay rates beforehand.

 How to Create a Payment Schedule for Your Restaurant

Processing restaurant payroll is not just a matter of how employees are paid, but also when they are paid, which involves setting up a payment schedule.

Some states have state payday requirements stipulating when employees should be paid, but several allow you to decide for yourself. Employees can be paid on a monthly basis, a weekly basis, or using a two-week pay cycle – the most common pay period in the hospitality industry.

An emerging payment schedule is the real time payment option. Technologies like your restaurant POS system may enable daily pay periods, giving workers access to their daily wages at the end of their shifts. This is beneficial for employees as it gives them constant access to their pay.

Once a payroll schedule has been chosen, set up direct deposits into your employees’ bank accounts. This is preferable to writing checks because you can’t predict when an employee will cash their check, and this could cause cash-flow complications for the restaurant.

Keep in mind that this only applies to the base wage and not tips earned by tipped employees, which are taken home at the end of a shift, often in cash.

Rules and Regulations for Tipped Employees

One of the reasons that running payroll for restaurants can become complicated is because of the complex rules around paying tipped employees.

Who Qualifies as a Tipped Employee?

The Department of Labor defines a tipped employee as someone who “engages in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.”

However, much like minimum wage requirements, this definition varies from state to state. Occupations like valets and porters fall under this definition, but research shows that about 60% of tipped employees in the U.S. are servers and bartenders.

Under the FLSA, there are special provisions for the payment and taxation of tipped employees. Concepts like tip credit are unique to tipped employees. The maximum tip credit allowed under federal law is $5.12 per hour. This means employers may pay employees as little as $2.13 per hour as long as the tips made per hour can bring the employee’s total hourly earnings to at least $7.25, which is the federal minimum wage.

However, tips received by a tipped employee are considered remuneration for their employment and are deemed to have been paid by the employer for purposes of the employer share of FICA taxes imposed on employee income. The FICA tip credit attempts to ameliorate the financial burden of paying these taxes on the employer. It allows employers to take a credit against their federal income based on the amount of FICA and Medicare taxes paid on tips reported to the employer.

Rules for Tipped Employees

The FLSA regulations related to tipped employees underwent amendments in December 2020, with the federal DOL publishing a Final Rule which includes the following regulations:

• An employer taking a tip credit may require tipped employees to perform untipped work related to their tipped work when that work is performed “contemporaneously with” or “for a reasonable time immediately before or after” the employee’s tipped duties. There is no limit on the precise time an employee can spend on untipped tasks.
• The Final Rule also provides guidance on what untipped tasks are considered to be related to tipped work, commonly called “sidework”. These include setting tables, toasting bread, making coffee, and occasionally doing the dishes.
• There are no restrictions on the tasks an employer can assign to an employee to whom it pays the full minimum wage before tips are included.
• A tip is the sole property of the tipped employee, regardless of whether the employer takes a tip credit. The FLSA prohibits any arrangement between the employer and the tipped employee where any part of the tip becomes the property of the employer.
• Employers who don’t take a tip credit are permitted to create a tip pooling system that distributes tips to both tipped and untipped employees. However, managers and supervisory employees are prohibited from participating in a tip pool. Employers who take a tip credit can set up a tip pooling system but must limit it to tipped employees. There is no federal limit on maximum contribution to a mandatory tip pool, but employers are required to notify tipped employees of any required tip pool contribution. 

What is Fair Scheduling?

In addition to the rules around tipped employees, you also need to consider the laws surrounding fair scheduling.

Fair scheduling – also known as predictive scheduling – is a set of labor laws designed to protect shift workers in the hospitality sector by setting mandatory requirements for restaurant managers and owners related to scheduling.

While the laws may vary between states, most will include the following stipulations:

• Advanced posting of schedules
• Employer penalties for unexpected schedule changes
• Prohibitions on requiring employees to find replacements for scheduled shifts if they are unable to work
• Record-keeping requirements for employers
• Employee rights to breaks during and between shifts

So far, Oregon is the only state with statewide fair scheduling laws in place, but several cities across the country like San Francisco, New York City, and Seattle have had these laws in place for years. As a restauranteur, you should know whether these laws apply in your city and make managerial provisions to ensure that you’re compliant with them in case they do.

Understanding Payroll Tax

Another important factor in your restaurant payroll costs is payroll tax.

Payroll tax is a blanket term for all wage-related taxes paid by a business to the IRS when distributing pay to employees. There are two types of payroll taxes:

1. Those that come out of your own pocket. These include FICA tax, which covers social security and Medicare, and FUTA tax which covers unemployment insurance. According to the IRS, the current FICA tax rate is 15.3% of the employee’s gross pay, of which the employer and employee each pay 7.65%. The current FUTA tax rate is 6% of the first $7,000 of wages, although many businesses qualify for state tax credits that bring it down to only 0.6%.

2. Those you collect from employee paychecks and remit to the government. These include federal income taxes, and state and local taxes.

The IRS provides an employment tax due dates schedule to help restaurant owners know when to file their taxes. However, the process and procedures around paying payroll taxes will vary between states. You should check with your local tax bureau to understand the full scope of your tax remittance duties as an employer.

It should be noted that all tips earned by a tipped employee totaling $20 or more per month are subject to federal income tax and FICA tax.

Choosing a Restaurant Payroll Software

If all this sounds a little overwhelming, don’t panic because you don’t necessarily have to run restaurant payroll on your own.

Restaurant owners generally have a few options for running payroll: running restaurant payroll manually, hiring a specialist, or using a restaurant payroll provider that integrates with your POS system. The latter enables owners to pull data through the system and calculate a labor cost percentage – completely automating the process for you.

Push Operations is an example of cloud-based payroll software that links and automates employee scheduling, time tracking, and payroll together, removing the need for three separate applications to run these functions.

Using software like Push Operations to run your restaurant payroll is a much better alternative to manual payroll for several reasons:

• Significantly reduces the risk of human error and subsequent losses
• Seamless data transfer and assured data security
• Assured payroll compliance
• Easy calculation of complex payroll intricacies like multiple pay rates
• Increased productivity and time saving
• Manually calculates statutory holiday pay
• Integrates with other operations systems like your POS to save you time and money

And with food and staff being two of the largest expenses that restaurant owners face, using a restaurant payroll software that enables you to streamline information is a game-changer for the bottom line. In other words, if you want to save time on bookkeeping and keep your payroll costs in check, restaurant payroll software is your best bet.

There’s no question that the restaurant payroll process can be daunting – especially for a new restaurant owner. However, when you take the time to set up payroll properly, brush up on the laws and regulations surrounding tipped employees, and use appropriate restaurant payroll services, the process becomes significantly easier.

Disclaimer: This article provides general information and should not be construed as payroll and payroll tax advice. Since rules may change over time and can vary by location and industry, please consult an accountant or tax advisor for advice specific to your business.

by Tommy Truong

Tommy is the Partnership Director at Push Operations, with a passion for helping entrepreneurs scale their business with technology. He loves hot sauce, fried chicken, and running with his Boston terriers.

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Integrations Labor