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.
Understanding the ins and outs of paying employees, observing labor laws, and complying with the tax code is critical to running a business.
While payroll has historically been the source of a lot of stress for restaurant owners, there are a number of tools and resources to make it easier. Payroll jargon and processes aren't intrinsically complicated; they're usually just presented in difficult-to-understand ways.
We're here to demystify payroll so you can spend more time every week growing your business and doing what you do best.
Table of Contents
This restaurant payroll guide will teach you:
What is restaurant payroll?
Restaurant payroll is a system for calculating and managing the salaries of employees in a restaurant. Employers need to track hours, calculate wages, manage shift schedules, and maintain employee records. For restaurants, payroll includes hour wages as well as tips, which must be taken into account.
"Doing payroll," or “running payroll,” encompasses the following:
- 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.
Going through the payroll process is critical because it helps you avoid trouble with tax and labor authorities. Paying employees under the table (as in, 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—don't do it under any circumstances.
Doing payroll is a vital part of running a business because your restaurant is nothing without its team. If you pay employees accurately and on time, they'll keep showing up to work. And if you don't... you'll be left to fend for yourself.
How to create a payroll payment schedule
Step 1: Determine the employee payment schedule
Decide how often you want to pay your employees. There are a number of timelines that businesses use, each with their own advantages and disadvantages. Here's a few common options:
A monthly pay cycle, which means operators only have to run payroll once per month. This timing is not usually favored by employees, as it leaves them to rely on one check each month.
A weekly pay cycle, which is favored by employees. This schedule can be difficult to run manually for managers with more than a handful of employees.
A two-week pay cycle, resulting in a bi-weekly pay schedule. This payment schedule involves 26 pay periods in a calendar year. This strikes a nice balance between the monthly and weekly, and is the most common pay period in the hospitality industry.
RASI suggests operators run their payroll weekly rather than bi-weekly or monthly. There are several advantages to this, including the following:
- It's easier for hourly employees to manage their finances. Accessing their funds every week makes budgeting more straightforward.
- Employee income is better documented, 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 has documented 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 that they've already earned, and helps to lower turnover rates—a huge issue in the restaurant industry.
Step 2: Setup the schedule with direct deposits
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 the onboarding process and deposit payments directly into their accounts on payday.
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.
Restaurant payroll guide to legal paperwork
You'll need to collect a variety of information from your staff to run payroll properly. This is usually done during the employee onboarding process. Ask them for:
- 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 such as a bank routing number and account number.
- Health insurance plan opt-in forms.
- Forms for any retirement savings plans, such as a 401(k).
- Forms for any other benefits plans.
7shifts’ Employee Onboarding can send onboarding packages to new employees that automatically include required tax forms.
Your payroll duties as an employer will look different depending on where your restaurant is located. 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 numbers of hours worked easier.
Recommended Download: Free Restaurant Timesheet Template
Step 2: Calculate payroll payments for employees
Once you've collected accurate data on the number of hours worked, here's how to calculate payments for your payroll:
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 has worked 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 the seaside town of 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 worked 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
- For 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 time period. This is to be added on top of any hour 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.
Tipped employees are classified by the U.S. Department of Labor as anyone who regularly makes more than $30 a month in tips. This constitutes most front-of-house restaurant employees such as 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 3.87% tax on people who work in the city.
- 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 are also responsible for the FUTA tax (Federal Unemployment Tax Act) amounting to 6% of the first $7000 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, you as an employer must subsidize their wage to match. Check your local laws for rules about paying tipped staff.
Step 5: The final payroll 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 calculator like this one.
How to prevent payroll tax issues
Here are a few simple steps to make sure you do in order to prevent any tax issues when it comes to doing your payroll.
1. Make sure you are tax compliant
Confusing tax codes are the root of many preventable payroll tax issues. Make sure that you're paying taxes for all levels of government that affect you and your employees—including federal, state, and any local tax. 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, and using software has cut this time in half at least," says Paul Kushner, CEO of MyBartender and Co-owner of Steam Pub in PA.
2. Get tip reporting in order
Errors with 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 you, the employer, have 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 adhere to any and all laws to ensure compliant scheduling.
What payroll records should you keep
The Fair Labor Standards Act (FLSA) and IRS require businesses to keep three years of payroll records in case of an audit. The records that you should keep include the following documentation:
- Employee information such as their name, social security number, mailing address, and contact information like phone numbers and email addresses.
- Paystubs with payment dates and total wages. These will also include 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.
Leo Smigel is the founder of Analyzing Alpha and has been involved with several restaurant ventures. He says: “In one instance, a fellow restaurateur friend faced a labor audit due to poor record-keeping...He had to juggle a ton of stuff himself, including doing payroll by hand. But, let's be honest, keeping track of all the numbers wasn't his cup of tea, and he messed up a few times.
Then, out of the blue, these labor audit folks showed up, and man, did they find a heap of issues. They discovered he'd gotten overtime wrong, goofed up the tip records, and even made a few mistakes with the tax stuff. Because of all these mix-ups, he got slapped with some big fines. And the audit was a pain in the neck – he had to dig out all sorts of paperwork and answer a million questions, which ate into the time he should have been spending running his place.
But the thing that really stung was how his staff reacted. Some felt they'd been shortchanged because of the payroll snafus. It took him a good while and a lot of elbow grease to win back their trust.
What happened to my friend was a real eye-opener for a lot of us in the biz. It drove home how important it is to keep your records straight, why you should use a decent payroll system, and how you've got to stay on top of the rules and regs.”
The easiest way to maintain proper records is by using payroll software. If you're not using software, make scans of paper records and upload them to a cloud-based drive such as Google Drive or Dropbox to ensure you don't lose them. Keep any paper copies safe and dry in a locked filing cabinet. For a full list of the documents and information you should be keeping, check out the IRS' full list.
How to choose a restaurant payroll provider
You may want to consider using payroll software to make payroll a lot simpler for you. Here's what you need to know about this software, and how to find the best option for your restaurant.
Benefits of using payroll software
Using payroll software is a great alternative to hiring a payroll specialist or agency to manage your restaurant's payroll, or doing it the old-school pen-and-paper way. When you automate your payroll process, you can pay employees accurately and on time, without issue. Integrate with your time clock and scheduling software to calculate wages, overtime pay, tax and benefit withholdings, and even employee payment. Payroll software is also incredibly useful for keeping records (which we'll cover later). The best part? Payroll software costs a fraction of what hiring a payroll professional costs.
“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. 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,” says Kam Talebi, CEO at The Butcher’s Tale in Minneapolis.
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 that has 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'll be able to work on and approve payroll while on the go, a great solution for busy restaurant life.
- Customer support: Make sure that your payroll software comes with comprehensive customer support, such as phone and live chat. Like the kitchen, payroll has a lot of 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.
Examples of payroll software
There are a number of payroll software solutions, and some even integrate with 7shifts. These include:
- 7shifts: The complete team management platform to hire, train, schedule, pay, and retain staff.
- 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
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 3 years. However, if there are audits or missed tax returns that need investigation you should be prepared to hold on to the documents for at least 7 years or more.
Running payroll may not be the most exciting part of running a restaurant, but it's one of the most essential. It can be intimidating, but by preparing yourself with the right information and tools, you can make it a bit easier. We hope this restaurant payroll guide has demystified the payroll process for you and has empowered you to take on your payroll with a newfound confidence in 2023.
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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Ana Cvetkovic is a freelance writer. She is also the CEO of BLOOM Digital Marketing, a creative marketing agency that helps the hospitality and tourism industries reach millennials online.