Did you know that payroll/labor makes up almost one-third of a restaurant's operating costs? While most restaurateurs are experts in hospitality and customer service, payroll makes many savvy business owners scratch their heads.
While payroll has historically been the source of a lot of stress for restaurant owners, there are several tools and resources to make it easier. Payroll jargon and processes aren't intrinsically complicated; they're usually just presented in ways that are tougher to understand than necessary!
What is restaurant payroll?
Restaurant payroll is the system a restaurant uses to calculate and manage employee pay. All employers need to track hours, calculate wages, manage shift schedules, and maintain employee records. But this can be a bit more complicated for restaurants, which also need to factor in tips, tip credits, and accounting for paying tipped employees for their non-tipped work.
Running payroll encompasses:
- Calculating how much money (including tips) your business owes employees and contractors during a specific pay period
- Calculating how much the business owes in payroll taxes
- Calculating how much the business needs to withhold from employees' paychecks for taxes and benefits
- Paying employees what they are owed on time
- Paying into benefits on behalf of your employees
- Paying taxes on behalf of the business and its employees
- Updating your payroll records in case of an audit
It’s a long list, but it’s all necessary to keep businesses out of trouble with tax and labor authorities. Paying employees under the table (without reporting their earnings to tax authorities and evading employment taxes) is a serious crime that can lead to hefty fines and time behind bars. This restaurant in Mystic, CT, got hit with a $100,000 penalty from the IRS after paying employees under the table for years.
Choosing and implementing the right payroll schedule
While selecting a payroll schedule isn’t the sort of thing that’s likely to make or break your business, your choice here does matter — and could have surprising impacts on employee morale.
Types of payroll schedules
Businesses can choose the payroll schedule that works best for them — within certain guidelines and limitations, which, again, can vary by state. Most restaurant operators go with monthly, weekly, or bi-weekly schedules.
- Monthly pay cycle: Restaurants run payroll only once per month. This is often the least favorite for many employees because it leaves them to rely on one check each month. And while it’s simpler for restaurant management, it can lead to some cash flow problems for smaller restaurants.
- Weekly pay cycle: Restaurants run payroll every single week. Employees love this, but it can be difficult to run manually in some restaurant contexts. It can also be challenging to turn around quickly when you have tipped employees (but rely on manual accounting and reporting processes instead of using modern restaurant payroll software).
- Bi-weekly pay cycle: Restaurants run payroll every other week, usually on the same day, resulting in a bi-weekly pay schedule (or 26 pay periods in a calendar year). This strikes a balance between the monthly and weekly and is the most common pay period in the hospitality industry.
Which payroll schedule should my restaurant use?
Restaurant accounting platform RASI suggests operators run their payroll weekly rather than bi-weekly or monthly. There are several advantages to this:
- It's easier for hourly employees to manage their finances. Accessing their funds every week makes budgeting more straightforward.
- It’s a better way to document employee income, allowing them to qualify more easily for loans.
- Businesses can track and manage cash more accurately as they spend less time accruing a cash liability.
- In conjunction with charge tips on checks, weekly payroll provides audit transparency regarding direct and indirectly tipped employees. It's common practice for an auditor to use an employee's W2 against the payroll register.
RASI found a 26% increase in employee retention for businesses that run weekly payroll, stemming from increased employee satisfaction.
“Additionally, we recommend making Monday or Tuesday your paydays when running weekly payroll. This best practice allows operators to compress administrative work into slower days and includes the previous weekend's pay in the check," says Dan Jacobs, Chief Operating Officer of RASI.
Another emerging payment schedule is the “real-time” payment option. These technologies enable a daily pay period, giving workers access to their wages as soon as their shift is over. Getting paid daily means workers are never stuck waiting for money they've already earned, and helps lower turnover rates — a huge issue in the restaurant industry.
Setting up direct deposit for your payroll
After choosing a payroll schedule, set up direct deposits into your employees' bank accounts. ACH bank transfers are a convenient, low-cost alternative to writing checks. Collect bank information from employees during onboarding and deposit payments directly into their accounts on payday.
How you’ll do this depends on your bank and the digital tools you already use for payroll. Not seeing direct deposit as an option? That could be a sign it’s time to switch payroll providers.
Payroll software is an invaluable tool that helps automate payroll processing to save time and make sure you never miss a payday. When your staff scheduling tool integrates with your payroll software, doing payroll is a breeze.
Navigating legal paperwork for payroll: What you need from your staff
You'll need to collect certain information from employees during the onboarding process:
- Personal contact information, including a legal name and address
- Tax forms that include a Social Security number and requested tax withholdings, like a W-4 for employees and a W-9 for contractors
- Direct deposit information, like bank routing numbers and account numbers
- Health insurance plan opt-in forms
- Forms for any retirement savings plans, such as a 401(k)
- Forms for any other benefits plans
Your payroll duties as an employer will differ depending on your restaurant’s location. Look into legal guides and consult a payroll specialist (lawyer, accountant, HR specialist, or another business owner) to make sure you understand your responsibilities.
How to calculate payments for payroll
Figuring out how much to pay your employees isn't as straightforward as multiplying hourly wages by hours worked, especially in the restaurant industry. As an employer, you're responsible for withholding taxes from your employees' wages, which is where payroll gets tricky.
Step 1: Determine hours worked
First, you must determine the hours worked by each employee from your time clock or timesheets. 7shifts users can use our 7punches time clocking system to easily integrate their time clock, schedule, and payroll, making tracking the number of hours worked easier.
Step 2: Calculate payroll payments for employees
Once you collect accurate data on the number of hours worked, calculate your employees' gross pay (how much they earn before taxes are withheld). For salaried positions, like managers, gross pay will be the same every pay period, determined by their annual rate.
For hourly roles like servers, multiple hourly rates by hours worked during the pay period.
If an employee works more than 40 hours in a single week, you must compensate them for overtime at a rate of at least 1.5 times their normal hourly pay.
For example, let's say that you run a restaurant in Ocean City, NJ, and you want to calculate payroll for your server, Max. After tips, Max makes the state minimum wage of $10/hour. If they work 40 hours one week and 45 the next, you would calculate their wage as follows:
- 80 hours at $10/hour = $800
- 5 overtime hours at ($10 x 1.5) = $75
- or a total of $875
Step 3: Distribute tips earned
Distribute tips to tipped employees as per your tip pooling agreement. Tip pooling is the process of sharing tips between employees. All tipped workers, such as waiters and bartenders, include all their tip income with hours worked to determine how much they should get paid for that period. Add this to any hourly wages earned. (Tip pooling software can simplify tip-out calculations.)
If you use the tip credit, make sure tipped employees' wages meet the state minimum wage after tips. Otherwise, your business will have to make up the difference out of pocket.
How to calculate a tip credit, if the state allows them.
The U.S. Department of Labor classifies tipped employees as anyone who regularly makes more than $30 a month in tips. This constitutes most front-of-house restaurant employees like servers, runners, hosts, and bartenders. Some states have their own qualifications.
Check your state's rules to make sure you're compliant.
Step 4: Tax calculations and considerations
Calculate withholdings for the following taxes and deductions:
- Federal income taxes: These taxes range from 10-37% based on an employee's annual income and their status as single, married, or head of household.
- State income taxes: Check your state's tax code to find out if your employees are subject to state income tax withholding.
- Local taxes: Some cities and municipalities charge professionals an added income tax on top of the state. Philadelphia, for example, imposes a 3.75% tax on people who live and work in the city, but 3.44% for non-resident employees.
- Federal Insurance Contributions Act (FICA) taxes: FICA is the tax levied on employers to pay Social Security and Medicare. This money helps fund these programs, which help people in need of retirement healthcare or other assistance.
Employees and employers split paying this tax. Withhold 6.2% of an employee's gross pay for Social Security tax and 1.45% for Medicare tax. You'll cover the remaining 7.65% (6.2% + 1.45%) out of pocket.
- Deductions for benefits like health insurance, 401(k), dental, vision, etc.: Employees should elect how much they want to be deducted from their paychecks for these programs during onboarding.
While employees pay for many of their own payroll taxes through withholding, there are some costs that restaurants have to pay on behalf of employees, including:
- FICA taxes: As we mentioned, employers owe 7.65% of an employee's gross pay in these taxes. You’re also responsible for the FUTA tax (Federal Unemployment Tax Act) amounting to 6% of the first $7,000 of an employee’s wages. However, you may receive a 5.4% credit back if you pay the FUTA tax in full and on time.
- Retirement matching: If your business matches your employees' retirement savings. This is usually reserved for high-level salaried employees such as a GM or executive chef.
- Subsidizing tipped wages: If an employee's wage doesn't total at least the minimum wage requirement after tips, the employer must subsidize their wage to match. Check your local laws for rules about paying tipped staff.
Step 5: The final payout
Let's revisit our server, Max. We calculated their gross paycheck to be $875 in the above step. However, after deducting federal, state, local, and FICA taxes from their paycheck, they go home with $732.
An easy way to calculate payroll taxes and wages is to use a paycheck calculator like this one.
Common payroll issues restaurants face
- Misclassifying employees: Classifying regular staff as independent contractors is generally incorrect. Other misclassifications include paying the tipped minimum wage to non-tipped employees (or for non-tipped work above a certain threshold)
- Managing tipped income: Tips belong to employees, not the restaurant or the owner. Owners and managers may collect tips for distribution in a valid tip pooling agreement, but even then, the money must all be returned to employees — not managers or owners.
Common violations include putting managers into the tip pool, confiscating tips, and deducting all tips from wages.
- Overtime pay: All hourly employees earn overtime pay for anything over 40 hours worked in a week. It’s easy to calculate this rate incorrectly when doing it by hand.
- Staying current on regulations: state and local regulations are constantly changing, so what was right and legal last week might not be today.
For a deeper dive into common mistakes restaurants make with payroll, check out these seven common restaurant payroll mistakes.
How to prevent payroll tax issues & penalties
1. Make sure you’re tax compliant
Confusing tax codes are the root of many preventable payroll tax issues. Make sure you're paying taxes for all levels of government that affect you and your employees — including federal, state, and local taxes (if applicable).
Hiring a payroll specialist or using payroll software can help you avoid common mistakes.
"I spent years looking through ledgers and handwritten schedules to figure out billable hours,” says Paul Kushner, CEO of MyBartender and Co-owner of Steam Pub in PA.”Using software has cut this time in half at least."
2. Get tip reporting in order
Errors in reporting tipped wages are also a common way that restaurants get into tax trouble. The employee is responsible for tracking and reporting tips to the IRS as income. Tipped workers must make at least the state minimum wage after tips, or else the employer has to supplement their earnings to make up the difference.
Check out the guide from the IRS for all the rules and regulations surrounding employee tips.
3. Don't overlook local labor laws
For example, six cities and the state of Oregon currently have predictive scheduling regulations. Otherwise known as fair scheduling or secure scheduling, these are policies designed to protect employees with mandated scheduling practices. These often include:
- How far in advance staff must know their scheduled shifts
- Predictability pay for schedule changes or cancellations
- Minimum hours between shifts (to eliminate the clopen)
- “Good faith” hours estimates for new hires
- Employee rights to refuse or request shifts
Check to see what your state, city, or municipality requires, and be sure to follow any and all laws to ensure compliant scheduling.
4. Use reliable payroll software
Running payroll manually isn’t just a drain on your time and resources. It’s also a great way to end up with compliance issues — or worse.
But when you use reliable payroll software, you can sleep better at night knowing that your software is keeping track of all those compliance details for you. Good software will allow you to automate your payroll process, increasing accuracy, on-time payment, and ultimately employee satisfaction.
Plus, some payroll software is more comprehensive, taking care of your time clock, scheduling, payroll, tip pooling, tax and withholdings, and maybe even employee training and communication. By keeping all those functions in one tool, you lessen the chances of miscommunication, pay mistakes, and tax violations.
“The consequences of not keeping accurate payroll are having to go back for months or years to make these mistakes right with the employees and government. This often comes with fines as well, and is why nearly every restaurant outsources their payroll,” says Kam Talebi, CEO at The Butcher’s Tale in Minneapolis.
Talebi adds, “You get the expertise of a company that focuses solely on payroll at a lower cost than hiring someone full time. However, after you’ve opened multiple locations, it often makes sense to hire a full-time payroll expert. Once you get to this stage, you’ll need good payroll software to track everything and ensure you won’t be paying out for old, recurring mistakes.”
If you're already using payroll software but you're not sure if it's the right one, check these signs you should switch payroll companies.
5. Don’t throw out your payroll records
The Fair Labor Standards Act (FLSA) and IRS require businesses to keep three years of payroll records in case of an audit (check out FLSA Fact Sheet #21, among others), including::
- Employee information (name, Social Security number, mailing address, phone number, and email address)
- Paystubs with payment dates and total wages (including tax and benefit deductions)
- Time clock data or timesheets listing hours worked, overtime, and breaks
- Tax forms for the IRS. These include W-4s (employee withholdings) as well as W-2s and W-3s (wages and tax statements)
- Payroll tax forms 941 and 944, which include quarterly and annual tax payment information
The easiest way to maintain proper records is by using payroll software. If you're not using software, scan paper records and upload them to Google Drive or a similar cloud storage service to ensure you don't lose them. Keep any paper copies safe and dry in a locked filing cabinet.
Check out the IRS' complete list of the documents and information you should keep.
How to choose the right payroll software
If you decide to manage payroll by using software, there are several things you should keep in mind while shopping around:
- Ease of use: Look for software with a simple interface and intuitive functionalities. You don't want it to take more time than doing it manually. You also want your employees to be able to access their information and pay stubs easily whenever they need.
- Mobile-ready: If the software has a mobile version, you can work on and approve payroll while on the go — a great solution for busy restaurant life.
- Customer support: Make sure your payroll software comes with comprehensive customer support, such as phone and live chat. Like the kitchen, payroll has many moving parts, so good client support is a must when choosing software.
- A seamless solution: Simplify the number of systems you use. Choose a platform that offers payroll along with other tools like time tracking, labor budgeting, and tip management. Lower costs and reduce time spent fixing errors between systems.
- Made for restaurants: Choose a software designed to address tips, labor, compliance, union fees, onboarding, and tax calculations so paying your employees is a breeze.
Common payroll systems used by restaurants
There are several payroll software solutions on the market, and some even integrate with 7shifts. These include:
- 7shifts Payroll
- ADP Run and Workforce Now
For a full list of payroll and POS software companies that integrate with 7shifts, check out our integrated partners page.
Frequently asked questions
Who handles payroll in a restaurant?
It usually depends on the size of your restaurant or hospitality business. For many independent single-location restaurants, the owner, operator, or manager handles payroll directly. The same is true for franchises or multi-location restaurants where locations handle payroll individually.
Larger companies may employ payroll specialists to handle this function in a centralized way. It’s also possible to outsource payroll to a vendor.
How much does it cost to hire someone to do payroll?
Hiring someone to do payroll will vary drastically on the size and type of company. If the company is small, a CPA or other professional firm might cost anywhere from $2,500-$5,000 depending on complexity (losses, employees working in more than one state, etc).
For a larger company such as a restaurant with 10+ employees, there may be an additional charge for taxes like unemployment insurance and workers' comp if applicable.
How long should you maintain payroll records?
In general, it is good practice to maintain payroll records for three years. However, if there are audits or missed tax returns that need investigation, you should hold on to the documents for at least seven years or more.
Gain more insight on making your payroll processes easier than ever
Running payroll well is essential for ongoing restaurant success and stability. It can be intimidating, but with the right information and tools, you can take charge of your payroll processes, get compliant, and reclaim time you can pour back into growing your business.
Check out these helpful resources for managing payroll:
Disclaimer: The information in this article is general in nature and businesses should consider whether the information is appropriate to their needs. Legal and other matters referred to in this article are based on 7shifts' interpretation of laws existing at the time and should not be relied on in place of professional legal advice. 7shifts is not responsible for the content of any site owned by a third party that may be linked to this article, and no warranty is made by 7shifts concerning the suitability, accuracy, or timeliness of the content of any site that may be linked to this article. 7shifts disclaims all liability (except for any liability which by law cannot be excluded) for any error, inaccuracy, or omission from the information contained in this article and any loss or damage suffered by any person directly or indirectly through relying on the information contained in this article.
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