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How to Run Payroll for Restaurants

December 29, 2022

Ever run payroll for a restaurant? If not, we’re here to guide you through the entire process, from registering the business to filing annual tax returns.

Blog Post

Running payroll for a restaurant can be a daunting process, but it doesn’t have to be. Whether you’ve just opened your first location or reached your first dozen, here is a quick reference to make sure you’ve got everything covered from being legally compliant to financially profitable.

In this article, we’ll outline the basics for setting up payroll at your restaurant and give you a checklist for running that payroll.

Restaurant Payroll Laws

To fully grasp the nuances of restaurant payroll, owners need to first be aware of the legislation that influences it.

Perhaps the most important piece of said legislation is the Fair Labor Standards Act (FLSA). Enacted in 1938, the FLSA created several of today’s most common workforce standards, such as minimum wage, overtime pay, hours worked, and youth labor for both the private and public sectors. At the state level, there are often laws that build upon the FLSA, and some cities even have local laws that do the same.

Other relevant legislation restaurant owners should know include the Occupational Safety and Health Act (OSHA), Employee Retirement Income Security Act (ERISA), and Family and Medical Leave Act (FMLA). OSHA focuses on maintaining a safe working environment for employees, while ERISA regulates employee benefit plans. Finally, FMLA mandates organizations with 50+ employees to provide said employees with protected leave in case of illness or the illness of a spouse, parent, or child.

Legislation Relevant to Restaurant Payroll

Law Enacted Summary

Fair Labor Standards Act (FLSA)

1938

Created common workforce standards, such as minimum wage, overtime pay, hours worked, and youth labor requirements. States, and even some cities, have extra laws that build upon the FLSA.

Occupational Safety and Health Act (OSHA)

1971 Requirements for maintaining a safe work environment for employees to use.

Employee Retirement Income Security Act (ERISA)

1974

Requirements for operating and regulating pension and health benefit plans for employees.

Family and Medical Leave Act (FMLA)

1993

Requires employers with 50 or more employees to provide those employees with protected leave in case of illness or the illness of a spouse, parent, or child.

How To Set Up Restaurant Payroll

With so much legislation to review and remember, it’s quite clear how complicated restaurant payroll can be. It’s no surprise then that restaurant owners should take great care when organizing and processing their payroll to avoid costly fines or legal hassles.

Complete the Necessary Paperwork

Menus and napkins aren’t the only paper products on which a restaurant is built. Before an owner even gets to picking font types, they need to complete several steps and forms to ensure the entire establishment is legally aboveboard.

  • Choose the business’ structure as either a limited liability company (LLC), corporation, partnership, or sole proprietorship. This will impact how the restaurant pays and files its taxes.
  • Register the business at the federal and state levels to obtain a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (IRS) and a state EIN from the state’s department of labor and department of revenue. These IDs will allow the business to pay and file the necessary taxes from each payroll.
  • Report all new hires to the state, and have all employees complete their I-9 and W-4 forms. I-9s confirm an employee’s work eligibility, while W-4s help determine how much income taxes an employer should withhold from each employee’s paycheck. It’s also best to create an electronic or physical folder on each employee with these and any other important forms (e.g., job application, direct deposit information, etc.) in case of a future audit. Some states have additional requirements to provide employees with key compensation and position information upon hire.
  • Identify which payroll tax forms to file each week, month, quarter, or year. This will depend on the chosen payroll schedule, state agency, and the IRS.
  • Purchase worker’s compensation insurance in case an employee is injured while working. This is usually a legal requirement but can vary by state.
  • Choose a payroll system to help track and store payroll information for future reference. The best platforms can manage benefits, calculate and withhold payroll taxes, and collect and store important forms among other features. Some systems will also include a mobile app to make accessing and managing information easier.
  • Create and distribute an employee handbook to house various workplace standards, employee expectations, payroll policies, etc. for workers to reference whenever they need.

Calculate How Much Revenue Should Go to Payroll

Depending on a restaurant’s offerings and setup, the ideal percentage of revenue to devote to payroll is between 20% – 35% of the restaurant’s total revenue. Less expensive or fast-food restaurants may want to use a lower percentage, while high-end establishments may want to use a larger one given the higher quality of their offerings and specialization of their staff.

Create a Payroll Schedule

A restaurant’s payroll schedule is influenced by a variety of factors, such as what state you are located or operating in, any state regulations for tipped workers and the restaurant industry, how the employees are compensated (hourly or salaried), and if any employees are eligible for overtime (exempt or non-exempt).

One factor that can particularly impact this setup is the fact it will only apply to base wages the employer provides directly to the employee. Employees who work for tips (i.e., Tipped Employees) will have extra earnings to take home every shift and they’re often in cash.

Know How to Pay Tipped Employees

Per the IRS, “Tips are discretionary (optional or extra) payments determined by a customer that employees receive from customers.” As such, the FLSA defines tipped employees as, “…individuals engaged in occupations in which they customarily and regularly receive more than $30 a month in tips.”

Due to the complexity of this subject and state mandated reporting, it’s imperative for restaurants to use an accurate reporting system that tracks exactly how much each employee earned in tips after each shift.

Under the Federal Insurance Contributions Act (FICA) most restaurant owners may use these tip earnings to offset the base wage they directly pay employees when fulfilling federal and state minimum wage requirements. If using this tip credit method, the FLSA states employers must pay tipped employees a base wage of at least $2.13 per hour, thus limiting the tip credit rate an employer can claim to $5.12 per hour when trying to meet the total minimum wage rate of $7.25 per hour. Note, seven states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) and the territory of Guam do not allow this tip credit method, and employers in those areas must pay employees the full minimum wage.

Federal Pay Requirements for Tipped Employees

To meet the federal minimum wage threshold of Owners can pay tipped employees a base salary of If the employee also earns tips at a rate of (at least)

$7.25 per hour

$2.13 per hour

$5.12 per hour

Account for Multiple Pay Rates

Restaurant employees can sometimes perform multiple roles that have different wage rates. Accounting for multiple pay rates by tracking exactly how many hours an employee worked in each role is therefore important to ensure payroll accuracy.

Restaurant owners should make sure there is a detailed reporting system available to track how many hours each employee worked in their various positions.

Set Up Direct Deposit

While optional in many states, being able to deposit an employee’s wages directly to her or his bank account saves both the employee and employer time and energy. Employees will simply need to provide their Automated Clearing House (ACH) information, which includes the routing number for their financial institution and their account number within that institution.

Keep Detailed Records

Depending on the state, most restaurants will store payroll records for three years, unless there are certain circumstances involved, such as misreported income or failing to file tax returns. In those cases, owners should keep payroll records for at least six years and sometimes indefinitely.

How To Run Restaurant Payroll

After employees submit all timesheets and tip reports, either in print or digitally, owners can begin calculating the various amounts needed to complete the payroll process.

Calculate Gross Pay

Gross pay is the total sum an employee earns over the course of the pay period. For hourly employees, this is found by multiplying the base wage by the number of hours worked, while for salaried employees, it’s found by dividing their annual salary by the total number of pay periods in the year.

For example, if Employee A is paid an hourly rate of $17 and worked 40 hours over the last two weeks, she or he would have a gross pay of $680 (40 x $17). If Employee B is paid an annual salary of $42,000 and will have 24 pay periods a year, she or he would have a gross pay of $1,750 for each payroll.

There are a few things to remember when calculating gross pay. First, did the employee perform multiple roles that have different pay rates? If so, rates, amounts, hours worked, etc. for all the employee’s roles need to be included when calculating gross pay.

Second, did the employee work any overtime? If the restaurant pays 1.5 times the minimum wage for overtime hours and Employee A, an hourly non-exempt employee, worked an additional 10 hours of overtime, she or he would be paid a rate of $25.50 per overtime hour (1.5 x $17) for a total of $255 in overtime wages (10 x $25.50). Combined with the normal base wage ($680), Employee A earned a total gross pay of $935.

Under the FLSA, if a tipped employee works overtime, the employer must pay the employee at least 1.5 times the minimum wage, then subtract the tip credit to come to the employee’s direct cash wage. For example, Employee C in Kentucky earns the standard FLSA wage rates (a base wage of $2.13 per hour and a tip credit rate of $5.12 an hour for a total minimum wage of $7.25 per hour). The standard overtime rate would therefore be $10.88 per hour ($7.25 x 1.5) while the adjusted overtime rate would be $5.76 per hour after subtracting the tip credit rate ($10.88 - $5.12). Note, some states don’t follow the FLSA and have their own methods of calculating overtime.

Example of Calculating Base Wage + Tips

Kentucky Wage Rates

Min Wage: $7.25 hourly
Base Wage: $2.13 hourly

Standard Overtime Pay = Min Wage X Overtime Rate

$10.88 hourly = $7.25 hourly X 1.5

Minimum Tips: $5.12 hourly

Tipped Overtime Pay = Min Tips Wage – Standard OT Pay

$5.76 hourly = $5.12 hourly – $10.88 hourly

Thus, if Employee C worked 40 normal hours and 10 overtime hours, she or he would have earned $85.20 in normal wages (40 x $2.13) and $57.60 in overtime wages (10 x $5.76) for a total wage of $142.80. Combine all of Employee C’s reported tips with that total wage to find her or his total gross pay.

Total Base Wage
$85.20

Base Wages X Hours Worked
$2.13 hourly X 40

Total Tipped OT Wage
$57.60

Tipped OT Pay X Hours Worked
$5.76 hourly X 10

Total Wage
$142.80

Total Tipped OT Wages + Total Base Wages
$57.60 + $85.20

Calculate Tipped Pay to Meet Minimum Wage

With each employee’s gross pay established, owners then need to confirm if their tipped employees’ paychecks will fulfill the minimum wage threshold for that state. Again, if a tipped employee’s combined base wage and tips do not meet the state’s minimum wage amount, the employer must make up the difference.

Calculate Deductions and Taxes

Next, restaurant owners will need to calculate and subtract all voluntary, pre-tax deductions and then withhold all taxes due to the government from each employee’s gross pay. These pre-tax deductions are ones employees choose to have removed from their paychecks, such as health insurance premiums or retirement contributions.

The most common federal payroll taxes are for Social Security, Medicare, Unemployment tax, and Income tax, which employers can pay on the Electronic Federal Tax Payment System (EFTPS).

The specific amounts due for these taxes will also vary based on the employee’s earning that pay period both in direct wages and tips. The IRS considers tips to be taxable income and the total income from tips reported to an employer must equal at least 8% of the business’ total receipts for that pay period.

In most states and federally, employers pay unemployment taxes themselves but split the payment of Social Security and Medicare taxes with employees. Employees are responsible for paying their state and federal Income Tax, but employers still need to withhold and remit the necessary amounts on each employee’s behalf based on the federal and state withholding forms.

Calculate and Deposit Net Pay

An employee’s net pay is the total amount employees receive after all deductions and taxes are taken from their gross pay. Simply put, this is the amount that will actually be deposited into an employee’s bank account.

To find an employee’s net pay, simply subtract all withholdings, garnishments, federal, state, and local income taxes, and federal Social Security and Medicare taxes from the total gross pay.

How To Choose The Right Forms To File Restaurant Payroll Taxes

After a restaurant finishes processing payroll for a pay period, it still needs to file certain forms to the federal and state governments regarding the amounts and taxes involved in that payroll. At the federal level the most common forms a restaurant will need to file are:

  • Form 940 – Annually filed form due every January 31 that reports the federal unemployment taxes the restaurant paid.
  • Form 941 – Quarterly filed form due every April 30, July 31, October 31, and January 31 that reports the federal Social Security, Medicare, and Income taxes the restaurant paid or remitted.

At the state level, most restaurants will need to file similar forms regarding withheld payroll taxes, unemployment taxes, and workers compensation insurance. It's very common for these forms to be submitted quarterly, but their names and specific due dates can vary so it’s important for restaurant owners to familiarize themselves with their state’s requirements .

How To Choose A Restaurant Payroll Provider

From stocking ingredients to cleaning the floors, there are so many demands when owning a restaurant, let alone a successful one. Setting up and running the restaurant’s payroll is as crucial a component as it is complicated, but that doesn’t mean owners have to manage it alone.

Investing in a payroll provider with robust tools like Paylocity can not only alleviate stress from running payroll, but also save ownership the time and energy needed to focus on other priorities.

  • Payroll Software: Our award-winning platform not only streamlines the entire payroll process, it also provides expert tax services, on-demand payment options, expense tracking and reimbursement, and wage garnishment features.
  • Workforce Management: It’s crucial for restaurants to have accurate and precise time tracking for all employees. Our Time & Attendance solution handles all of those tracking and scheduling needs automatically.
  • Benefits Administration: Reducing employee turnover is imperative for a restaurant to run as efficiently as possible, and offering competitive benefits goes a long way to achieving that goal. Our Benefit Administration tools make it easy for both owners and employees to review plan offerings and track balances.
  • Mobile Flexibility: What good are powerful tools if users have to be at a computer to access them? The Paylocity Mobile App gives users the flexibility to use all our tools whenever and wherever they need.

Request a demo today to learn more about how we can help make running restaurant payroll as easy as taking someone’s reservation.

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