According to the National Restaurant Association, the restaurant industry in the United States employs approximately 15.1 million people. In 2022, this industry generated an estimated $800 billion in sales. On average, labor cost in a restaurant varies from 30% to 35% of its monthly profit, suggesting that the restaurant sector spent roughly $280 billion on payroll expenses last year.
Because labor costs are among the most significant in the food service industry, managing payroll for restaurants is a critical task for restaurant owners. In this article, we will focus on how to run payroll in this industry and provide practical advice to improve your current wage calculations process.
The fundamentals of restaurant payroll
In its basic form, restaurant payroll is the system used for dealing with all salary-related questions in the food service industry. The employer is responsible for controlling working hours, estimating compensation, monitoring shift schedules, and keeping comprehensive records of their staff. They also need to consider hourly rates and tips, which need to be accurately computed to ensure fair compensation for employees.
Payroll professionals have several responsibilities. These include:
- timely payment of workers,
- avoiding penalties and legal problems,
- correct tax calculations,
- saving precise records of staff salaries.
Establishing a transparent payroll process is vitally important, as it helps protect your business from legal issues and other complications. Concealing wages and evading payroll taxes are severe crimes, which can lead to huge fines and even imprisonment. Practicing openness in payroll reporting will help you avoid problems with regulatory agencies and maintain a positive reputation in the industry.
How to run restaurant payroll
Now that you understand the basics of payroll for restaurants, let’s move to guidelines for managing paychecks. Employers need to have the following documents in place:
- Federal Employee Identification Number (EIN),
- a separate bank account to guarantee settlements with workers and payment of taxes,
- completed papers, such as W-4,
- payroll schedule.
Once you have gathered all of the necessary documents, you can begin managing payroll. To do so, you need to be aware of minimum wage laws. In the United States, the federal minimum wage is $7.25 per hour. However, in some regions, such as Texas and New Mexico, employers may pay a tipped employee $2.13 per hour. It is important to remember that service charges are not treated as regular tips, and they are subject to the same tax regulations as regular wages.
Minimum wage or salary with tips
If your restaurant is located in a region where tip credits are permitted, you must carefully compute regular wages in order to determine fair compensation. Let’s analyze the following example:
Emma earns $2.13 an hour. She worked 36 hours in 7 days and obtained a $165 tip.
To work out Emma’s compensation, you must perform the following calculations.
Define ordinary income:
$2.13*36 = $76.68
Next, add the sum from the tip reporting:
$76.68 + $165 = $241.68
We need to assess whether Emma’s compensation is adequate. So, we compare her earnings to 36 hours of work under the federal minimum wage.
$7.25*36 = $261
By law, Emma should have received $261, but instead she made $241.68. This means that the employer must compensate the difference:
$261 – $241.68 = $19.32
Even with tips, Emma does not earn enough, so the employer needs to pay her an additional $19.32.
Proper accounting for overtime
When tipped employees work overtime, the payment process becomes more complicated. According to labor laws, an employee is entitled to overtime pay when they work more than 40 hours in a week. The overtime rate is at least 1.5 times more than the regular hourly rate.
Consider this situation: Harry is a waiter who operates 45 hours weekly. He is a Virginia resident with a salary of $2.13.
Harry’s common salary:
40*$2.13 = $85.20
Overtime per hour:
$7.25*1.5 = $10.88
Then, you need to adjust the sum per hour, considering the allowable tip size, which is $5.12 in Virginia:
$10.88 – $5.12 = $5.76
Since Harry has operated 45 hours, he is entitled to 5 hours of overtime pay:
$5.76*5 = $28.8
This means that in a week, Harry must receive:
$85.20+$28.8 = $114
On top of these calculations, the employer would need to consider Harry’s tips and determine if additional pay is needed to meet the minimum payout. This can be a tedious task, especially when multiple employees are in the mix.
Some words about multiple pay rates
Unlike office staff, restaurant workers often occupy several roles that come with different pay rates. To determine fair compensation, the employer needs to accurately track the total hours worked by an employee in each role. For example, you need to know how many hours an employee spends working in the kitchen and how many hours he spends performing floor manager duties per month.
Complications can arise when tipped workers perform different roles. Employers need to carefully oversee the allocation of tipped wages versus the minimum wage and track the time spent in each role.
Options for distributing tips
Suppose you’re doing business in a region that requires employers to differentiate between a tipped worker’s salary and the minimum wage. In such cases, you can decide how to distribute tips between your restaurant staff. Let’s look at some of the most common scenarios:
- Each employee who receives a tip uses it independently.
- Tips are distributed among all tipped workers.
- Tips are distributed depending on position. Business owners often choose the breakdown; for example, bussers get 15%, bartenders receive 25%, and waitstaff take 60% of tips.
- You can also distribute tips among all personnel.
In the final months of 2020, changes were made to the Fair Labor Act, particularly directives related to workers’ receipt of tips. Following the approval of these regulations, the Ministry of Labor published Fair Scheduling, which specifically addresses this aspect of wage regulations. These changes aimed to provide employees with more predictable and transparent work schedules.
What taxes do you have to pay
For busy restaurant owners, it can be difficult to stay up to date on tax laws while meeting business obligations. Not only are tax laws always changing, but federal and regional agencies also have different tax payment schedules, with some mandatory payments due quarterly and others annually. To guarantee compliance, we recommend consulting with financial professionals who know how to correctly pay the following payroll taxes:
- Revenue taxes: these range from 10% to 37%, depending on the worker’s position and annual earnings.
- State revenue tax: look into regional duty code to verify whether you need to withhold this payment.
- Local duties: some localities levy extra duties on workers and state payments. If you are registered in Philadelphia, be prepared to pay an additional burden of 3.87%.
- FICA are taxes levied on employers to guarantee staff welfare and Medicare. Workers and business owners pay this tax in half, each remitting 7.65% of the specialist’s gross salary.
Sometimes, you pay more or less than you owe in taxes. In the event of an overpayment, the IRS will automatically refund you the extra money. No further action is required on your part.
Primary documents for successful payroll management
At the federal level, restaurants are required to fill out various quarterly and annual reports when managing payroll. Consider some of the most commonly used payroll forms in the food service industry:
- Form 940 is a yearly payroll report that reflects the federal unemployment tax paid over a period of 12 months. Such a duty is deducted not from staff salaries, but rather from the business’s income.
- Form 941 provides payroll insights for staff, including total revenue, social security, medicare, and salary.
- W-2 summarizes an employee’s wages earned over 12 months. It provides detailed information on the amount of taxes you have withheld, taking into account the worker’s specifications on Form W-4.
Depending on the type of entity you have chosen, your workers may need to fill out additional documents before you can start managing their payroll. These forms may collect information about employee benefits or bank account details, especially if you plan to make payments through direct deposits.
Features of forming a payment schedule
When it comes to paying your food service workers, you have several options to choose from. Each option has its own advantages and drawbacks. The most popular solutions include:
- Monthly pay structure: financial professionals only perform payroll once a month. While efficient on the administrative end, this method can make it more difficult for workers to manage their finances, as they rely on a single payment for a 30-day period.
- Weekly pay structure: the most preferred solution among employees. According to the finance firm Rasi, businesses that choose weekly payroll enjoy a 26 percent increase in employee retention.
- Bi-weekly pay structure: this provides for payouts once in two weeks, resulting in 26 payment periods per year. Implementing this payment schedule guarantees an equilibrium between monthly and weekly payments, and is the most common system in the food service sector.
In recent years, the popularity of real-time payment has increased. In this system, workers have immediate access to their earnings at the end of the shift. This eliminates the need for them to rely on credit or loans while waiting for their next paycheck.
Advice for restaurant payroll
Food service establishments often face specific challenges when it comes to payroll. This is due not only to the large number of employees, but also to the diversity of roles that they occupy. To ensure the accurate and timely administration of payroll, owners should consider the following guidelines:
- Classify workers correctly: restaurants often have many employees; some work full-time, others part-time, and others are paid by the hour. It is essential to correctly classify each employee, as this will affect payroll and tax payments.
- Accurately track time worked: restaurant employees often operate various hours and shifts, which makes it challenging to track each worker’s hours. We recommend using a digital entry to accurately record hours worked.
- Monitor compliance with labor laws: restaurant owners must be aware of federal and regional regulations, including minimum wage laws and overtime accounting. Violation of these laws can lead to huge fines and even imprisonment.
You can also find some helpful advice about restaurant payroll on David Scott Peters’ blog. With over 30 years of experience in the fast-food sector, he teaches independent restaurant owners how to achieve financial freedom.
Benefits of outsourcing restaurant payroll
If you are a restaurant owner, you need payroll services to fairly compensate your staff and accurately compute your taxes. Outsourcing these tasks can provide your business with much more than accurate estimates and timely payment for your workers. Consider these additional benefits of outsourcing:
- Precise handling of different payments: specialists accurately classify each employee and determine their work schedule and pay rate.
- Maximum efficiency: when you outsource payroll, you free up time to focus on your restaurant’s main operations. Professionals will accurately calculate each worker’s earnings and handle all necessary payments.
- Improved business decision-making: it’s not just about knowing how much you spend on payroll, but also using that information to make strategic decisions that increase profitability. Payroll professionals provide detailed payroll statements that contain the insights you need to optimize your operations.
Managing a restaurant is complicated, as there are many tasks and responsibilities to divide your attention. From stock control to client service, there are many factors you need to monitor in order to guarantee that your business prospers. While you can’t outsource a restaurant’s entire operation, some responsibilities can and should be delegated to an outside organization, including payroll.
BooksTime will help you to streamline your payroll process and free up more time to focus on important business matters. No matter the size of your staff, the experienced professionals at BooksTime use state-of-the-art software to accurately process payments, ensuring that your employees are fairly compensated while staying in compliance with federal laws. Schedule a consultation to learn about individual payroll assistance for your business.
