A guide to payroll for restaurants

Owning and managing a restaurant means having to handle nonstop commotion. Customers are constantly coming in and out, and there’s a myriad restaurant staff: waiters, bussers, hosts, bartenders, chefs. So you can imagine how difficult it is to oversee all of these positions.

The hustle and bustle of a restaurant makes running payroll extremely difficult. Not only do you have to supervise tons of employees with varying salaries, from minimum wage and up, but you also have to factor in tips.

While setting up restaurant payroll may seem intimidating, it’s not nearly as complex when you break it down. You may struggle at first with the restaurant payroll process, but you’ll get the hang of it eventually. Payroll is essential for your business so your employees can be paid accurately and on time. So before you get overwhelmed, let’s break down how to do payroll into a few key aspects.

How to set up restaurant payroll

First things first: You need to set up restaurant payroll. However, you may be wondering,  what is payroll?  Payroll is the business process of paying employees. It includes calculating employee earnings and factoring out  federal and state payroll taxes . The restaurant payroll process is a little different than other businesses, so it’s important to be thorough with these steps. Here is how to do restaurant payroll:

1. Make sure you’ve completed all required paperwork

There are many paperwork requirements for business owners to consider as they set up payroll. We’ve created a quick checklist to help you manage these responsibilities:

Choose a business structure from the following: a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. LLC is the most common business structure for restaurants. The business structure you choose will determine how to approach restaurant payroll management.

• Obtain an  Employer Identification Number (EIN)  from the IRS. An EIN will be your business’ tax identification number when you file taxes.
• Register as an employer with your state’s labor department. You must do this so that you can pay mandatory state unemployment compensation tax.
• Sign up for worker’s compensation insurance. This is necessary to protect employees who may suffer injuries while on the job.
• Set up your payroll system with payroll tax withholdings and benefits. You’ll need to withhold a portion of each employee’s income for federal taxes. You’ll also need to make Social Security, Medicare, and FICA tax payments to the IRS.
• Have employees complete tax paperwork W-4 and I-9. W-4 is essential for you to calculate how much federal tax to withhold from an employee’s paycheck. I-9 is necessary to verify an employee’s work eligibility and is submitted to the U.S. Citizenship and Immigration Services.
• Create a file for each employee so you can keep track of important documents, such as their tax forms and bank information. You’ll want to keep this information safe and secure.
• Report new hires to your state’s new hire registry. This is mandatory for every new employee you bring on.
• Document restaurant payroll policies in an employee handbook. An employee handbook is useful for restaurant payroll management purposes, as well as documenting company culture, expectations, and policies.
• Complete any miscellaneous IRS forms. Depending on your restaurant, you’ll need to fill out various other forms to set up payroll, so be sure to check with the IRS.

2. Establish a payment schedule

Most restaurants pay employees every two weeks—either in the form of a check or direct deposit. You can also pay on a monthly or weekly basis depending on what makes sense for your restaurant.

The payment schedule refers to just the base wage that workers are paid. Employees who are tipped, such as the waitstaff, will usually take home their tips in cash. This is important to know before setting up your restaurant payroll.

Most restaurant employees are paid hourly with federal minimum wage. Thus, it’s imperative that you keep track of every employee’s hours so you don’t come across any issues with managing payroll. You can use a  paycheck calculator  to ensure that your employees are always paid correctly.

3. Set up direct deposit

Direct deposit is one of the most common forms of payment for U.S. employees— 93% of U.S. workers  receive their pay via direct deposit come pay day. With direct deposit, employees don’t have to go to a bank to deposit a check. Instead, the money goes straight into their bank account.

To set up direct deposit, you need your employee’s ACH billing information, including their account and routing number.

4. Plan for payroll taxes

Payroll tax is a wage-related tax that a business pays to the IRS.

There’s a difference between payroll tax and income tax. An employer is responsible for paying a portion of payroll tax, which includes Social Security tax, Medicare tax, and FUTA. An individual is responsible for paying income tax.

5. Understand regulations and labor laws around employee tips

Tip income is taxable income under the IRS, and the Department of Labor has set forth a variety of implications under the Fair Labor Standards Act (FLSA).

Generally, anyone who takes home more than $30 a month in tips is considered a tipped employee. As an employer, you cannot use an employee’s tips outside of using them as a FICA tip credit against your FLSA minimum wage requirements or to contribute to a tip pool.

Tipped employees are responsible for reporting their tipped wages to the IRS, so make sure your employees know the  new IRS policy on total tips  and tip reporting when onboarding.

6. Select a payroll system for your restaurant

Managing payroll can be difficult, which is why it’s helpful to use restaurant  payroll service  to simplify the process.

Using a  restaurant payroll software solution , like QuickBooks Payroll, will help streamline your restaurant operations. QuickBooks Payroll helps with time tracking, direct deposit, HR support, and much more, so you can be confident your employees are being paid accurately and on time.

Restaurant payroll FAQs

Now that we’ve covered the basics of how to do restaurant payroll, let’s get into some frequently asked questions:

How long do you need to keep payroll records?

A common question most restaurant owners will ask when it comes to managing payroll is:  How long do I need to keep payroll records?  The answer varies.

You’ll want to retain payroll records that support an item of income, deduction, or credit on your tax return until the period of limitations for that tax return has passed. The period of limitations refers to the time that you can modify your tax return to claim a refund or credit. You want to hold onto copies of filed tax returns as well, as they can help you prepare future tax returns.

What percentage should payroll be in a restaurant?

The percentage of payroll in a restaurant depends on the structure of the business. Generally speaking, restaurants should aim to keep their labor costs between 20% and 30%, but this can vary. For example, an upscale fine-dining restaurant with an elaborate menu will likely have a higher payroll percentage than a fast food restaurant with a simple menu.

To determine what percentage payroll should be in your restaurant, you’ll need to keep track of your employees’ tasks and hours worked.

How do you calculate gross pay and labor costs for a restaurant?

The way to calculate gross pay and labor costs for a restaurant is relatively simple. To calculate labor cost percentage, divide your labor cost by gross sales and then multiply the result by 100.

You’ll want to first calculate total revenue, which is your gross sales. You’ll then want to calculate your total payroll costs, which can be done by adding up all the expenses that go into employee wages. Then you’ll want to follow the labor cost percentage formula, which is:

(Total Labor Cost ÷ Total Sales) x 100 = Labor cost as a percentage of total sales

Are tips considered payroll?

One aspect of restaurant payroll that differs from other businesses is tips. Many employees in the restaurant industry, such as waitstaff and bartenders, rely on tips to fund their income. But this begs the question: Are tips considered payroll? An employer who has tipped employees has payroll responsibilities for tips that are considered taxable compensation. These taxable wages can subject an employer to additional payroll withholding, reporting, and payment requirements. So, if you have tipped employees, it’s crucial to pay attention to what’s considered a tip.

Tips are any payments that customers make without compulsion. An employer is responsible for withholding income tax and  FICA tax  on reported tips within given pay periods. Another factor you want to consider as a restaurant employer is tip pooling. A tip pool occurs when all tips from a specific night are collected and then evenly redistributed. Tip pooling is a common practice among restaurants. However, there are certain  tip pooling laws  that you should be aware of before adapting this policy, as this practice can make it more complex to run payroll. So, before you decide to split tips among your employees, make sure you read up on tip pooling laws.

Final notes

Setting up payroll for any small business is a large feat, but managing restaurant payroll is undeniably a complex process. There’s a lot you need to keep track of for payroll processing, but it’s crucial that you can pay your employees accurately and on time.

QuickBooks Payroll software can help you streamline payroll and give you back the time needed to grow your business.

The more efficiently you run your payroll, the more time you’ll have to put toward running your restaurant.