California restaurant payroll: A basic guide

Owning a restaurant isn’t just about passion; it’s about making a living. Many aspiring restaurateurs wonder, “How much can I actually make?”

A restaurant owner’s salary can vary widely, influenced by factors like location, type of restaurant, and business structure. On average, restaurant owners in the U.S. can make anywhere from $24,000 to $155,000 per year. But these numbers can be misleading without context. For instance, a small café owner in a rural area might be at the lower end of this range, while a successful fine dining restaurant owner in a bustling city could be at the higher end.

How Much Do Restaurant Owners Make?

The average earnings for restaurant owners can be surprisingly variable. According to sources like Payscale.com, Chron.com, and SimplyHired.com, restaurant owners’ salaries range from as low as $24,000 to as high as $155,000 annually. This wide range reflects the diversity in the restaurant industry—no two restaurants are the same, and neither are their earnings.

Factors influencing these earnings include:

• Location: Urban restaurants often earn more due to higher traffic and pricing.
• Type of Restaurant: Fast food joints generally have higher profit margins compared to full-service restaurants.
• Business Structure: Sole proprietorships might have different financial dynamics compared to partnerships or corporations.

For example, a fast-food restaurant owner in New York City might earn significantly more than a family-owned diner in a small town.

Factors Affecting Restaurant Owner Salaries

Understanding what impacts your salary as a restaurant owner can help you make strategic decisions. Let’s break down the key factors.

Business Structure

The way your restaurant is structured legally can significantly impact your salary. Here’s how:

• Sole Proprietorship: You and the business are one entity. Your salary is essentially the profit after expenses.
• Partnership: Profits are split among partners, affecting individual earnings.
• LLC (Limited Liability Company): Offers flexibility in how profits are distributed and taxed.
• Corporation: Salaries are separate from dividends, providing a clear distinction between earnings and business profits.

Multiple Owners

Having multiple owners can complicate salary distribution. If you co-own a restaurant, profits are typically divided based on ownership percentage. For example, if you own 60% of the business, you get 60% of the profits.

Tax Implications

Taxes can eat into your earnings. Different business structures have different tax obligations:

• Sole Proprietorship: Income is taxed as personal income.
• Partnership: Partners report their share of income on personal tax returns.
• LLC: Can choose to be taxed as a sole proprietorship, partnership, or corporation.
• Corporation: Subject to corporate taxes, and dividends are taxed again on personal returns.

Understanding these factors helps in better financial planning and maximizing your take-home pay.

How Seasonality and Variability Impact Salaries

Running a restaurant means dealing with ups and downs. Seasonal changes and monthly variability can significantly impact your earnings.

Seasonal Changes

Restaurants often experience seasonal fluctuations. For instance:

• Summer: Ice cream shops and beachside cafes thrive.
• Winter: Cozy diners and hot chocolate spots see a spike in business.

Using historical sales data can help predict these trends and plan accordingly. For example, a seafood restaurant by the coast might see a surge in summer but slow down in winter.

Predicting Busy and Slow Periods

Smart scheduling and inventory management are crucial. If you know December is a busy month due to holiday parties, you can stock up on supplies and schedule extra staff. Conversely, if January is slow, you might reduce inventory and cut back on hours to save costs.

Examples:

• Busy Period: Increase staff and inventory.
• Slow Period: Reduce hours and minimize stock.

By anticipating these changes, you can maintain profitability and ensure a steady income throughout the year.

Costs of Taking Personal Time

Owning a restaurant can be all-consuming. But what happens when you need a break?

Taking personal time as a restaurant owner isn’t just about having a life outside of work; it’s also about maintaining your sanity and health. However, this comes with financial implications. Closing the restaurant for holidays or slow periods can impact your bottom line. For instance, shutting down for a week might mean losing thousands in revenue.

Impact on Finances

• Lost Revenue: Every day closed is a day without income.
• Fixed Costs: Rent, utilities, and other fixed costs don’t take a break.
• Staff Costs: You might still need to pay key staff or offer holiday pay.

Work-Life Balance

Maintaining a work-life balance is crucial. Happy owners make for happy restaurants. Using tools like Homebase can help streamline operations, making it easier to manage time off without disrupting the business.

Comparing Owner’s Paycheck vs. Employees’ Paychecks

Ever feel like your employees are making more than you? You’re not alone.

In the early stages of running a restaurant, it’s common for owners to take home less than their employees. Waitstaff, for instance, can earn substantial tips, sometimes surpassing the owner’s earnings. This disparity can be frustrating but is often temporary.

Relative Earnings

• Waitstaff: Tips can significantly boost their income.
• Kitchen Staff: Hourly wages might be lower, but steady.
• Owners: Earnings are tied to the restaurant’s profitability.

Open-Book Management

Transparency with your team about financials can build trust. Explain why you might be taking a smaller paycheck initially and how it benefits the business long-term. Tools like Homebase’s employee happiness features can help keep morale high, reducing turnover and fostering a positive work environment.

Types of Restaurant Profit Margins Affecting Salaries

Profit margins directly impact your salary as a restaurant owner. Understanding these can help you strategize better.

Gross Profit

Gross profit is the difference between what you sell a dish for and what it costs to make it. For example, if you sell a burger for $10 and it costs $4 to make, your gross profit is $6.

Net Profit

Net profit is what’s left after you’ve paid all your operating expenses. This includes rent, utilities, salaries, and more. If your gross profit for the month is $10,000 and your expenses are $8,000, your net profit is $2,000.

Full-Service Restaurant Margins

Full-service restaurants typically have lower profit margins, ranging from 2% to 6%. Higher labor costs and lower turnover rates contribute to this.

Fast Food Restaurant Margins

Fast food restaurants usually enjoy higher profit margins, around 6% to 9%, due to lower labor costs and higher turnover rates.

How to Calculate Restaurant Profit Margins

Knowing how to calculate your profit margins is crucial for understanding your financial health.

Gross Profit Calculation

1. Total Revenue: Calculate your total sales.
2. COGS (Cost of Goods Sold): Sum up the costs of ingredients and materials.
3. Gross Profit: Subtract COGS from total revenue.

Example:

• Total Revenue: $20,000
• COGS: $8,000
• Gross Profit: $12,000

Net Profit Calculation

1. Gross Profit: Start with your gross profit.
2. Operating Expenses: Subtract all operating expenses (rent, utilities, wages).
3. Net Profit: The remaining amount is your net profit.

Example:

• Gross Profit: $12,000
• Operating Expenses: $10,000
• Net Profit: $2,000

Net Profit Percentage Calculation

1. Net Profit: Use your net profit figure.
2. Total Revenue: Use your total revenue figure.
3. Net Profit Percentage: Divide net profit by total revenue and multiply by 100.

Example:

• Net Profit: $2,000
• Total Revenue: $20,000
• Net Profit Percentage: 10%

Strategies to Improve Restaurant Profit Margins

Boosting your profit margins can directly increase your salary. Here are some actionable strategies.

Optimizing Menu Pricing

Price your menu items to cover costs and generate profit. Use data to understand what customers are willing to pay.

Updating Menu Layouts

A well-designed menu can guide customers to higher-margin items. Highlighting specials and premium dishes can boost sales.

Improving Table Turnover

Faster table turnover means more customers served and higher revenue. Train staff to be efficient without rushing guests.

Adding More Seating

If space allows, adding more tables can increase your capacity and revenue. Just ensure it doesn’t compromise customer experience.

Why Restaurant Profit Margins Are Typically Low

Restaurant profit margins are notoriously slim. Here’s why.

Big Three Expenses

1. COGS (Cost of Goods Sold): Ingredients and materials can be costly.
2. Labor: Wages, benefits, and payroll taxes add up.
3. Overhead: Rent, utilities, and other fixed costs are unavoidable.

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Common Taxes Affecting Restaurant Owners

Taxes are a significant part of running a restaurant. Understanding them can help manage your finances better.

Income Tax

Restaurant owners must pay income tax on their earnings. This includes both federal and state taxes.

Payroll Tax

Employers are responsible for payroll taxes, including social security, medicare, and unemployment taxes. These taxes can significantly impact your overall financial health.

Taxes on Tips

Tips are taxable income for employees. As an employer, you must ensure accurate reporting and withholding.

Property Tax

If you own your restaurant property, you’ll need to pay property taxes. Even if you lease, some agreements pass this cost on to you.

Tax Deductions for Restaurant Owners

Maximizing tax deductions can help reduce your taxable income, increasing your net earnings.

Marketing Expenses

Advertising and promotional costs are deductible. This includes social media ads, flyers, and special promotions.

Legal Fees

Legal fees related to your business are deductible. This can include contract reviews, litigation costs, and more.

Food Costs

The cost of ingredients and materials is deductible. Track these expenses meticulously.

Insurance

Business insurance premiums are deductible. This includes liability, property, and workers’ compensation insurance.

How to Report Tips to the IRS

Accurate tip reporting is essential for compliance and financial health.

Form 8027

Large food or beverage establishments must use Form 8027 to report employee tips.

Eight Percent Rule

The IRS requires that a minimum of eight percent of gross income be reported as tips.

Reporting Credit Card Tips

Use your Point of Sale (POS) system to track and report credit card tips accurately.

Risks of Audits for Restaurants

Restaurants are at a higher risk for audits. Here’s why and how to mitigate it.

Many Cash Transactions

High cash transactions can attract auditor scrutiny. Ensure accurate record-keeping to prove income.

High Turnover of Employees

Frequent employee turnover can lead to reporting inconsistencies. Maintain accurate records to avoid issues.

Volatile Inventory

Managing high-value, perishable inventory can attract audits. Use inventory management systems to keep accurate records.

What Is the Best Way to Determine Your Salary?

Determining your salary as a restaurant owner can be tricky. Here’s a practical approach.

Determining Market-Based Wages

Research what similar roles in your area earn. Use hiring websites or labor statistics to estimate wages.

Practical Example Calculations

Break down your responsibilities and assign a wage to each role. Combine these to determine a fair salary.

Example:

• Manager Duties: $50,000
• Chef Duties: $40,000
• Total Market-Based Salary: $90,000

Using tools like Homebase’s timesheets can help track your time and justify your salary based on hours worked and roles performed.

Is Owning a Restaurant Financially Viable?

Wondering if all this effort is worth it? Let’s break it down.

Financial Pros and Cons

Owning a restaurant can be lucrative but also comes with risks. High startup costs, slim profit margins, and long hours are common challenges. However, the potential for high earnings, personal satisfaction, and community impact can make it worthwhile.

Long-Term Profitability Insights

Successful restaurants often see profitability increase over time. Building a loyal customer base, optimizing operations, and effective marketing can lead to long-term success.

Using Homebase’s comprehensive suite of tools can streamline operations, reduce costs, and ultimately improve your restaurant’s profitability, making ownership more financially viable.

California-Specific Labor Laws for Restaurant Owners

Understanding complex labor laws is key. Your management team should also understand all the logistics and laws associated with managing employees. California restaurant workers have a number of protections that owners must follow. One of the biggest things to consider: payroll. Here are a few things you need to know.

Tip Sharing

Every restaurant employee must be paid the minimum wage. One of the advantages of California law is that there are no tipped minimums. Employers who have over 26 employees have to pay $14 an hour, and 25 or less must be paid $13. An annual increase will occur until 2023, when the standard becomes $15 per hour, regardless of tips.

In California, restaurant owners must pay workers the minimum wage in addition to tips. Frontline workers, cooks, waiters and waitresses, and bartenders can share tips. There must be a documented process in place to ensure each employee is fairly paid.

Additionally, any credit card processing fees related to those tips are the responsibility of the employer, not the employee.

Overtime

Current restaurant regulations dictate that restaurant owners must pay employees overtime pay. Anything over forty hours in a week, or more than eight hours in one day, is subject to overtime. Double-time pay starts after the employee has worked more than 12 hours in one day.

Additionally, restaurant workers who work seven days in a row must receive time and a half for the first eight hours of the seventh day, and double time for each hour worked over the eight.

Employees cannot waive their overtime pay. It is a requirement of the law that the employer must pay. Salaried employees must also receive overtime pay unless they are earning twice the minimum wage. If so, they fall into the exempt category and do not have to receive overtime.

One of the trickiest areas of payroll is when restaurant workers work at more than one location. Employees are still entitled to overtime even if their hours are split between different locations of your business. Anything over 40 hours is considered overtime.

Breaks

Restaurant workers must get a thirty-minute unpaid meal break for every five hours of work. A second thirty-minute break is required if they are scheduled to work for more than ten hours that day, unless the workday hours are less than 12.

Some employers grant a thirty-minute paid break if the employee must work during the break due to limited staff. Additionally, a paid ten-minute break is required for every four hours of work.

Split Shifts

When employees are scheduled to work and are sent home between shifts, the employee must receive one hour of premium pay. The premium does not have to be paid if the employee makes more than minimum wage.

Payroll Schedules

Restaurant owners are compelled by law to have a standard pay schedule so employees will know when they will be paid. Those who choose bi-weekly payroll must pay employees within seven days of the last day of the pay period. For instance, if the pay period is from February 7 – 20, employees must be paid by the 27th.

Restaurants that pay employees twice a month must pay wages owed within ten days of the last day of the period. That means workers who are due wages for the period between the 1st and 15th must be paid by the 25th, and workers who are due wages between the 16th and last day of the month are due by ten days after the last day of the month.

Vacation and Sick Time

While California law does not make it mandatory for employers to grant paid or unpaid vacation time to employees, this is an incentive employees appreciate. The perk helps keep morale high and promotes the attraction and retention of the best workers.

Under California law, restaurant employees must accrue paid sick leave at the rate of one hour for every 30 hours worked. This also includes any overtime they have worked. While this is a requirement, restaurant owners can place certain parameters around how it is paid out, and it can be capped at 24 hours per year.

There is a caveat – if the employee or a family member is sick or needs preventative care, restaurant managers must allow them to use their paid leave.

Jury Duty and Voting Leave Time

California law requires restaurant owners to grant time off for jury duty and cannot fire or penalize them for abiding by the summons. They do not, however, have to pay employees for the time used during jury duty.

Restaurant owners must allow time off to employees who wish to vote in an election. This time must be at the beginning or end of their shift, they must provide three days’ notice, and “no more than two hours of the time taken off for voting is without loss of pay.” All employers must post the notice of voting rights for employees ten days before an election.

Payroll Tax

California law requires employers to pay:

• Unemployment insurance tax
• Employment training tax
• State disability insurance tax (deducted from the employee’s wages)
• California personal income tax withheld (deducted from the employee’s wages)

There are a lot of regulations to remember, and having a system in place that can track and organize these laws and restrictions for accurate payroll is important.

Homebase is an all-in-one management platform with robust payroll features to automate the payroll process, like self-onboarding and e-signing of forms; automatic calculations of wages and taxes; automatic payment to employees, the state, and the IRS; and keeping track of California’s payroll