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.