Doing payroll for a restaurant is a sizeable investment of money, time, and restaurant owners’ resources. Further, the complexities around staying legally obedient and paying the staff on time can add to the stress levels.
Moreover, restaurant owners in the food and beverage industry must also factor in industry-specific laws related to employee scheduling and tipped wage workers.
According to the National Restaurant Association [NRA], there are 15.1M people employed in the US in the restaurant business in some capacity. Besides, it’s estimated that the industry generated $800 billion last year.
With this, we can estimate the restaurant industry spent approximately $280 billion on the payroll in 2020, given the average restaurant worker cost is around 30-35% of the restaurant’s monthly income.
Since restaurant payroll ranks high on the priority list for restaurant owners, it is a great idea to make sure you understand the employer payroll tax responsibilities from start to finish to stay legally compliant.
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Factors to Consider While Running Payroll for a Restaurant
You will need four things in place before you get started on doing payroll for a restaurant:
- An employee identification number and state tax ID number.
- A separate bank account to pay taxes and employees.
- I-9 and W-4 employment forms.
- A payroll schedule.
Once you have them in place, you can move on your setting up your restaurant payroll system.
The first different thing about the restaurant payroll is the minimum wage requirement. Notwithstanding standard employees, restaurant employees receive tips as a part of the income, also earn a minimum wage different from other employees. However, that depends on the state your business is in.
For example, even though the federal minimum wage per hour is currently $7.25, states like Virginia can pay tipped employees $2.50 minimum wage per hour. In contrast, other states like Washington and Florida have a higher-tipped minimum wage requirement.
Adding to this confusion, there are states like Nevada and California, where the restaurant owners must pay minimum wage in full to the tipped employees.
Having all this information is vital before you look for restaurant payroll services because you may or may not need to calculate the difference between the restaurant minimum and the standard minimum wage to understand if the employee has made up the difference.
Here are few things to consider while setting up payroll for your restaurant:
For calculating the payroll properly, you will need to start a proper tip reporting system. In case you are taking a tip credit, your tipped employees will have to report their tips to you daily to ensure appropriate payment.
All other tipped employees can report tips to you monthly, which will further ensure proper tax payments. Also, you must maintain a copy of all reported tips in case of an IRS audit or an employee complaint.
Minimum Wage vs. Tipped Wage
Unless your business is in California, Oregon, Nevada, Washington, Minnesota, Alaska, or Montana, you will need to be careful about calculating wages correctly. For understanding how payroll works for a restaurant, let’s consider the following calculation for a tipped employee who’s working in a state that allows a reduction in the minimum wage.
David currently earns $2.13 an hour. He worked 34 hours last week and got $150 in tips. Now, to calculate his cheque, you need to do the following:
34 x $2.13 = $72.42
Now next step is to add his tips to his wages:
$72.42 + $150.00 = $222.42
Further, to make up for the difference between the federal minimum wage and the tipped minimum wage, we need to ascertain whether if David’s tips are adequate or not by calculating:
34 x $7.25 = $246.50
By the federal minimum wage requirement, David has to receive a minimum of $246.50, though he has received just $222.42. This means his payment was insufficient.
$246.50 – $222.42 = $24.08
This concludes that David’s tip was not sufficient to qualify for the federal minimum wage requirement. Hence an additional $24.08 needs to be paid to David.
Multiple Pay Rates are Necessary
Restaurant employees usually have more than one role to perform, unlike an office or administrative position. Accordingly, with multiple roles come multiple pay rates. Therefore, it is essential to track how many hours an employee works as a cook and a floor manager.
Further, it can become more complicated when tipped employees enter the mix since you will also need to track tipped wages vs. federal minimum wage along with the hours worked in another role.
In case tipped employees work overtime, there’s a particular calculation you need to do for paying them properly. For example, Sam is a waiter who worked a total of 48 hours during the week. He is currently residing in Virginia, one of the states where his tipped wage is $2.13.
Here’s how you will calculate his overtime:
First of all, calculate Sam’s regular pay:
40 x $2.13 = $ 85.20
Further, you need to calculate the regular overtime wage:
$7.25 x 1.5 = $10.88 per hour
Now, you need to subtract the tip credit allowed in your state. Since Sam resides in Virginia, the tip credit his employer can make is $5.12.
$ 10.88 – $5.12 = $5.76 per hour for overtime
However, Sam worked for 48 hours, so he is qualified for a total of 7 hours of overtime, which makes the sum of:
8 x $5.76 = $ 46.08
This week Sam has earned a sum of:
$85.20 + $46.08 = $131.28
While finalizing his payment for the week, don’t forget to include his earned tips, which will conclude whether Sam needs any extra amount in his paycheck or not.
How to Run Payroll for Your Restaurant
If you live in a state where you have to calculate the difference between the regular minimum wage and your tipped employee’s minimum wage, you will first need to learn how you handle tips in your restaurant. Here are some important points:
- Each tipped employee preserves his or her tips.
- You usually pool tips among all tipped employees.
- Tips are shared on a role basis—for instance, 15% to bussers, 20% to bartenders, and 65% to servers.
On the other hand, if you start a policy where you want tips to be shared among all employees, please ensure to check out your state’s individual state laws regarding pooling tips.
Remember that you are required to pay all of your employees’ full minimum wage instead of reduced wage if your policy allows sharing tips. However, if you choose not to begin a tipping approach, your employees will simply hold their own tips.
Further, if you are paying a reduced wage to your tipped employees, here are the steps you need to follow for running a payroll:
- Collect timesheets while calculating gross pay.
- Make sure to collect tip reports from all tipped employees.
- Calculate the difference between reduced wage and minimum and required minimum wage and enter the contrast if necessary.
- Calculate all taxes, including federal income tax and both Social Security tax and Medicare, based on both wages and tip income.
- Also, make sure to keep a copy of each employee’s reported tips in their file.
As an employer, you are responsible for the following taxes:
- Payroll Taxes to the IRS: This includes both federal withholding and employee and employee portion of FICA.
- Federal Unemployment Tax Act: It is paid to the federal government, which funds the state unemployment programs. Further, they are quarterly.
- State Unemployment Tax Act: It is collected by your state that funds unemployment.
- Local Taxes: They are determined by your city or the location of your business.
Finally, you are responsible for filing IRS FORM 941 quarterly. It reports the total federal withholding tax along with employee and employer FICA tax. Furthermore, you have to file IRS FORM 940 – Employer’s Annual Federal Unemployment Tax, annually.
In case you tip credits, you can also file IRS FORM 8846, i.e., credit for Employer Social Security and Medicare Taxes. Moreover, some restaurants use FORM 8846 to obtain credit in a portion of social security and medicare taxes paid by them in place of their employee.
Easier Way to do Restaurant Payroll
Running a restaurant is a complicated process that involves a lot of moving parts. From inventory management to customer service, you have to take care of so many factors to run your restaurant business. While you cannot outsource these factors, there are some that you can, especially payroll.
If you choose an outsource payroll company near you, they can take care of all these points for you, thus leaving you enough time to focus on how to grow your restaurant business while you leave payroll to the pros.