The Nuances of Restaurant Payroll

There’s more than meets the eye when it comes to managing restaurant payroll. It’s crucial that you pay your employees accurately. Plus, you need to track industry one-of-a-kind tax and wage/hourly laws.

Another challenge is high staff turnover. Prior to COVID-19, The National Restaurant Association estimated that the average restaurant lost $150,000 annually due to staff turnover. According to the Center for Hospitality Research at Cornell University, losing a front-line employee costs a restaurant employer an average $5,864. This kind of sky-high rate can take its toll on your payroll process.

Many restaurants conduct most of their new hire paperwork using pencil and paper—a time-consuming endeavor. Switching to a digital onboarding process, such as ASAP Payroll Service’s Evolution software, can save you significant time each year. When a new employee completes an electronic W-4 as part of the onboarding process, the information will automatically flow to the payroll system to establish the proper federal income tax withholding.

Offboarding employees who leave your business create extra work, too. This means understanding final paycheck laws and abiding by them. For example, in California, a terminated employee must be given their final paycheck on their last day. In this instance, ASAP Payroll Service’s clients can go into the system or call to figure out the exact amount. However, not every state has this level of final pay standards, but most have rules regarding when a terminated employee must receive their last paycheck. Check your state’s department of labor for regulations.

Besides servers, you need to track cooks, bartenders, and assistant managers, because each may have a different pay rate. While tracking different wages isn’t unique to businesses, the process is more complicated for restaurants.

There’s more to consider than accurately processing payroll and paying your employees on time.

  • Classifying your employees/tips—while most employees will be classified non-exempt, meaning they will be paid a minimum wage (federal minimum wage—$7.25 per hour) and any accrued overtime, their tips also need to be tracked. According to the U.S. Department of Labor, an employee who classifies as receiving tips engages in an occupation where he or she customarily and regularly receives more than $30 per month in tips. In this instance, the employer of a tipped employee is only required to pay $2.13 per hour in direct wages, if that amount, combined with the tips received, at the very least equal the federal minimum wage. If the employee’s tips and the employer’s direct wages of at least $2.13 per hour do not equal the federal minimum hourly wage, then the employer must make up the difference. Many states, however, require higher direct wages for tipped employees. Please note that certain states and cities have higher minimum wage rates than the federal minimum requirements. It’s important to keep up-to-date on these changes, which generally occur on January 1 or July 1. In addition, states may have different tip credits, so be sure to check your state’s department of labor. It’s important that employers and managers follow federal and state rules.
  • Exempt employees—there are strict rules regarding when to classify an employee as exempt. While most restaurant workers won’t meet the job duties or salary requirements that qualify them to be considered exempt from overtime, be sure to check the Department of Labor’s website for more details. However, when overtime is warranted, it must be paid at a rate of at least 1.5 times the nonexempt employee’s weekly regular rate for each hour worked over 40 hours. States like Alaska and Nevada calculate the time based on hours worked per day, not 40 hours per week. Again, check the Department of Labor’s guidelines (
  • Cash/check tips vs. credit card tips—when a diner leaves a cash or check tip, that money is 100% the property of the server. However, credit card tips are handled differently. Depending on the state you’re in, the employee either receives 100% of the tip or the credit card processing fee is deducted from that tip. Then, too, service charges that you add to a customer’s bill, then pay your service staff, are considered wages, not tips. But tips issued via tip-splitting or tip-pooling (see below) are considered tips, regardless of which employee actually received that tip.
  • Tip pooling— means that, instead of employees keeping all the tips they earn, the tips must to be put into a pool and divided equally among the waitstaff, bussers, bartenders, and possibly the back-of-house employees during a work shift. In this instance, the employer needs to communicate to tipped employees that they must participate in a tip pool, and, a tip credit can only be issued for the number of tips that employee ultimately receives. For further clarification refer to the U.S. Department of Labor’s website ( and look for Tip Regulations Under the Fair Labor Standards Act.
  • To take advantage of this benefit, make sure your payroll tax calculations, filing, and payments are all accurate. This is a general business credit equal to the amount of employer Social Security and Medicare taxes that you paid on wages over and above the minimum wage for each employee (see IRS Form 8846).
  • Tip credit—make sure your employees report all tips, because, at the end of the year, if they were paid total wages that exceeded the applicable minimum wage for your business location, you can file for the Fair Labor Standards Act (FLSA) tip tax credit. Related to the restaurant industry, the FLSA allows a business owner to apply a credit up to $5.12 for the employee’s pay. The reasoning is that tips should make up this amount, which leaves the employer paying the difference in a wage, which is to be no less than $2.13. If the employee does not make up the difference in tips between the minimum wage and $2.13 an hour, the employer must meet the hourly minimum wage standard, which, in most cases, is the minimum wage of $7.25 an hour.
  • More than 10 employees— if more than 10 employees worked for you during the previous year, based on using the average number of employee hours worked on a typical business day, you need to complete IRS Form 8027, which tracks total tips, service charges, and gross receipts from food and beverages. If the total tips reported amount to less than 8% of your gross receipts, you must allocate the difference to your tipped employees. If you can prove that a lower rate should apply to your business, then you may request a rate lower than 8% from the IRS. And, if you are granted a lower rate, you should use it in the allocated tip calculation on IRS Form 8027.
  • Benefits and deductions—restaurants customarily provide a free or discounted meal during an employee’s shift. The IRS classifies this as a fringe benefit and it should be treated as taxable income. Because it’s considered a fringe benefit, it needs to be added to an employee’s pay when running payroll.
  • Within a single job, such as a cook, there can be different pay rates, depending on the shift worked, and employees may cover more than one shift during a pay period.
  • There may be employees who work more than one type of job within the same pay period. And, if you have multiple restaurant locations, it’s common for employees to work in more than one location. In this instance, labor expenses will need to be allocated based on the location.
  • As the restaurant owner—what deductions can you make from an employee’s paycheck? The FLSA allows employers to deduct certain costs of doing business from employees’ wages, only if the deductions do not result in the employee earning less than the minimum wage standards after the deduction. Such costs include uniforms, customers who fail to pay, or broken objects. Technically, deducting these costs is allowable, but restaurant owners need to make sure they’re not violating FLSA rules and regulations if this results in an employee’s wage falling below minimum wage.
  • Hiring restaurant employees can be a revolving door. Some may be receiving some form of government assistance, while others may have recently been released from the military, or perhaps jail. In these instances, if your restaurant hires such individuals, you can get up to $2,300 in tax credits after that employee has accrued 300 hours of work.

Managing the Details

If you’re new to the restaurant business, managing your staff can seem daunting. This is where a good online time and attendance system, such as ASAP Payroll Service, can help you track all your employees’ movement between shifts, job types, and locations. It will save you time and reduce payroll errors. We understand how the restaurant industry works and we can help you track:

  • Minimum Wage Alerts. We help keep you compliant with your state’s minimum wage laws and make sure your employees receive their accurate pay.
  • FICA Tip Credit Report. We run this report to help you configure and track what you can claim on your annual tax return.
  • Tip sign-off report. This report provides you with written proof of your employees’ tips received and declared. This helps to keep you compliant.

And, if the IRS or another agency contacts a restauranteur regarding filing their taxes, based on how ASAP Payroll Service filed the paperwork, we’ll work with that government agency, representing the restaurant owner to resolve the issue. If ASAP Payroll made an error, we’ll talk to the government agency on your behalf and pay any fines.

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