How to Do Payroll for Restaurants: Tips & Best Practices

Payroll can eat up nearly a third of a restaurant’s operating costs. And even great operators can get stuck in the weeds.

The good news: restaurant payroll isn’t mysterious, it’s just easy to overcomplicate. With a simple process (and the right tools), you can run it accurately and stay compliant.

What is restaurant payroll?

Restaurant payroll is the process of calculating wages (and tips), withholding the right taxes, and paying your team accurately and on time.

It also includes the record-keeping and filings that keep you compliant with tax and labor laws.

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 paying tipped employees for their non-tipped work.

Running payroll typically includes:

• Tracking time: Collect accurate hours, breaks, and overtime.
• Calculating gross pay: Wages, different pay rates, and tip income.
• Withholding taxes: Federal/state/local income tax and employee FICA.
• Paying into benefits: If you offer perks like healthcare, dental, 401(k), etc.
• Paying employees: On your scheduled payday (direct deposit or check).
• Paying employer taxes: Employer FICA, FUTA, and SUTA.
• Maintaining records: Store payroll docs in case of audits.

Payroll is one of those areas where “close enough” can get expensive. If you’re unsure about a rule in your area, confirm it with your state labor agency or a payroll pro.

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.

 

 

How to choose a payroll schedule

Your payroll schedule won’t make or break your restaurant. But it can affect cash flow, admin time, and employee morale.

Note: some states set rules for how often you must pay employees. Check your local requirements before you commit.

Types of payroll schedules

Schedule	Why restaurants use it	Common tradeoff
Weekly	Best for hourly teams; easier budgeting for staff	More frequent processing (unless automated)
Bi-weekly	Most common; balances consistency + admin time	Two-months-per-year have 3 pay periods
Monthly	Lowest admin lift	Often hardest on hourly employees’ cash flow

• Monthly pay cycle: 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: Starbucks recently announced a change to this pay structure. 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. Their data shows a 26% increase in employee retention for restaurants that pay weekly.

• Employee budgeting: Hourly staff can plan week-to-week with less stress.
• Cleaner documentation: More frequent payroll creates clearer income records.
• Better visibility: You can track and manage cash more accurately and reduce the “accrued liability” that builds up between paydays.
• Audit transparency: Weekly payroll can make tip reporting easier to reconcile. It’s common practice for an auditor to use an employee’s W2 against the payroll register.

“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 option gaining steam is real-time (daily) pay. It gives employees access to earned wages right after a shift. This helps lower turnover rates — a huge issue in the restaurant industry.

Payroll setup: quick checklist

• Register your business: EIN + state tax accounts.
• Collect employee forms: W-4 and I-9 for every new hire.
• Choose pay frequency: Weekly or bi-weekly are most common.
• Pick a payment method: Direct deposit is simplest.
• Lock in tip rules: Tip pooling policy + reporting process.
• Set up record-keeping: Store paystubs, timesheets, and filings.

Setting up direct deposit for payroll

Direct deposit (ACH) is the fastest way to pay your team. Collect bank details during onboarding, then schedule deposits for payday. The benefits of direct deposit include:

• Fewer mistakes since there are no lost checks or manual payouts
• Lower admin load with less printing, signing, and tracking
• Better employee experience since they’re paid reliably and on time

If direct deposit isn’t available through your current provider, it may be time to switch. In restaurants, integrations matter—especially between scheduling, time tracking, and payroll.

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.

 

 

Employee documents you need for payroll

Restaurant payroll is only as accurate as the info you collect on day one. Get your restaurant onboarding checklist right, and everything downstream gets easier.

• Legal name + address: Matches tax forms and year-end reporting.
• W-4 (employees) / W-9 (contractors): Sets up withholding correctly.
• Social Security number: Required for tax reporting.
• I-9 verification: Confirms work eligibility.
• Direct deposit details: Routing ad account numbers (if using ACH).
• Benefits elections: Health insurance, retirement, and other deductions.

Requirements can change by state and city. 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

Restaurant payroll is more than hours × wage. You also need to factor in tips, overtime, and tax withholding.

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 time clocking system to easily integrate their time clock, schedule, and payroll, making it easier to track hours worked.

Step 2: Calculate gross pay

Gross pay is what an employee earns before taxes and deductions. For salaried roles, it’s typically the same each pay period.

For hourly roles, multiply the hours worked by the pay rate. If someone works over 40 hours in a workweek, pay overtime at 1.5x their regular rate (at minimum). Learn more in our guide to time clock rules for hourly employees.

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
• $800 + $75 = $875

Step 3: Add and distribute tips

Distribute tips based on your tip pooling agreement.

• Tip pooling: A shared system for distributing tips across eligible employees.
• Tip credit: If you use it, confirm each tipped employee still reaches at least minimum wage after tips.

Tip management software can simplify tip-out calculations. It can also help you ensure that you pay out the difference if an employee’s tips don’t get them to minimum wage.

 

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: Consider tax calculations and considerations

Restaurant payroll taxes come in two buckets: what you withhold from employees, and what you pay as the employer.

Taxes withheld from employee paychecks

1. Federal income taxes: Based on the employee’s W-4 and earnings. These taxes range from 10-37% based on an employee’s annual income and their status as single, married, or head of household.
2. State income taxes: Check your state’s tax code to find out if your employees are subject to state income tax withholding.
3. 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.
4. 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.
5. 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.

Employer-paid payroll taxes (and related costs)

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:

1. Employer FICA: As we mentioned, employers owe 7.65% of an employee’s gross pay in these taxes.
2. FUTA tax: The Federal Unemployment Tax Act amounts 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.
3. SUTA: The State Unemployment Tax Act varies by state.
4. 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.
5. Tip credit portion: 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.

We made a video about what to know before you run your first payroll, which you can watch below.

Common payroll issues restaurants face

• Misclassifying employees: Classifying regular staff as independent contractors is generally incorrect. Also avoid paying tipped minimum wage to non-tipped employees.
• 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

Restaurants typically don’t get in trouble for malicious reasons. They get in trouble because they miss one small payroll detail—then repeat it for months.

1. Stay current on tax requirements

Tax compliance is layered—federal, state, and sometimes local. The rules also change more often than most operators expect.

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.

• Best habit: Set a quarterly reminder to review tax and labor updates in your area.
• Lowest-effort option: Use payroll software that updates tax tables and automates filings.

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 IRS guide on tip recordkeeping and reporting for all the rules and regulations surrounding employee tips. You can also review our guide to tip pooling laws by state and federal level for location-specific details.

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

Payroll software should save you time and reduce risk. If it creates more work, it’s the wrong tool. There are several things you should keep in mind while shopping around:

• Restaurant-ready tips: Tip pooling, tip reporting, and tip credit support.
• Scheduling + POS integrations: Less manual entry, fewer payroll mistakes.
• Easy to use: Simple interface and intuitive functionalities. You also want your employees to be able to access their information and pay stubs easily whenever they need.
• Automated taxes: Calculates and supports filings across jurisdictions.
• Mobile-ready: Run and approve payroll while on the go.
• Customer support: Fast help when money is on the line.

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
• Gusto
• ADP Run and Workforce Now
• Quickbooks
• Paychex
• RASI

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?

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.

What percentage of revenue should go to restaurant payroll?

Most restaurants aim to keep labor around 25–35% of revenue. See our restaurant labor cost percentage guide for benchmarks by concept type. The right target depends on service style, hours, and staffing model.

What is the tip credit and how does it work?

The tip credit can allow a lower cash wage for tipped employees if tips bring them up to at least minimum wage. Rules vary by state—and some states don’t allow a tip credit at all.

What payroll taxes do restaurants pay?

Restaurants typically pay employer FICA, FUTA, and state unemployment (SUTA), and withhold income tax and employee FICA from paychecks. Your exact obligations depend on where you operate.

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?

The FLSA and IRS recommend keeping payroll records for at least 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.

Next steps to manage your restaurant’s payroll

• If you’re setting up payroll, start with onboarding forms, pay schedule, and tip out rules
• If you’re already running payroll, audit overtime, tip pooling, and record-keeping
• If you’re scaling locations, standardize policies, then use software to enforce them

Running restaurant payroll well is essential for ongoing success and stability. It can be intimidating, but the right tools make it manageable. With the right information, you can get compliant and reclaim time to grow your business.

Check out these helpful resources for managing payroll:

• Free Restaurant Timesheet Template
• How Gusto! Simplified Payroll and Stays Engaged With Their Team
• A Restaurant’s Guide to Switching Payroll Providers (+ Free Checklist Download)
• 7 Signs Your Restaurant’s Payroll Company Isn’t Working Out