Setting Up Restaurant Payroll: 5-Must Do’s

Payroll is often a struggle for business owners of all industries, but many people don’t realize that restaurant payroll comes with its own set of hurdles. It’s complex and can take several hours per employee—especially if you don’t have the right software on your side. The paperwork involved in running a restaurant includes more than just employee wages and total tips. If you’re setting out to run payroll for your restaurant for the first time, following these five steps will make the process much easier each pay period.

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Complete Legal Paperwork for Restaurant Payroll

The paperwork involved with each employee is a nonstop responsibility in the restaurant industry. Knowing and following the law starts with building a team—from the cooks in the back to the hostess at the front door. As soon as a worker is hired, you’ll need to file a new hire report with your state. Your employee will need to submit a W-4 as well as an I-9. The Internal Revenue Service (IRS) will have all the federal information, and you can check out your state labor websites to learn more about the regulations in your area. For additional information, take a look at our article on payroll forms you need to know.

The Structure of the Company and Additional Forms

Many restaurants are considered a Limited Liability Company (LLC). However, if you own a smaller restaurant or food stand, it may be a Sole Proprietorship. Larger restaurants that grow to different locations may be an S- Corp or a C-Corp. For a Sole Proprietorship, the owner's social security number can be used on forms, and LLCs and Corporations use an Employer Identification Number (EIN). However, Sole Proprietorships have the option of also requesting an EIN to use instead of a social security number, which you can do here.

Required Forms

Employees must fill out a W-4 form and I-9 form before they can work for the company. The W-4 informs how much tax should be withheld from each paycheck, and the I-9 offers proof that an employee is a citizen legally authorized to work in the United States. Finally, if you paid at least $1,500 during the year in wages for your team, or employed someone for at least 20 weeks during 1 year, you must file Form 940, Employers’ Annual FUTA Tax Return.

Form a Payroll Schedule

All payments to employees, including tip income, fall in a cycle that you and your employees agree upon. The most common payroll schedules in the restaurant industry are every week or every two weeks. The day you will pay your employees depends on how you see best to manage your money. You may decide to pay your employees on a Friday, but if you find it challenging to get the workers back for the weekend once they receive their payments, you might choose to schedule your payday for the beginning or middle of the week. Since we live in the digital world today, where paper checks are no longer the most convenient payment method, direct deposit has taken the reins. It is easier, quicker, and more efficient — and it follows a timely cycle from the restaurant account to the bank accounts of each employee. Every employee must fill out a direct deposit form and all the paperwork required at the time of hiring. Note: In the case an employee doesn’t authorize direct deposit, most states require you to provide a paper check. Take a look at your state labor law guide to find out what the law says in your area.

Calculating Workers’ Payroll Taxes

It is critical to remember that every employee's time worked will vary. Keeping track of hours worked and tips is another employer responsibility, and employees should also keep track to avoid discrepancies. Some workers may have salaries, while others will have hourly wages and some may be paid partial minimum wage. Partial minimum wage means they earn an hourly wage below minimum wage and their tips are added in to bring them up to no less than minimum wage. Reporting tipped income can be tricky when it comes to payroll records and tax filing. Many employee tips are paid in cash. Some servers receive tips according to the tables assigned, while other restaurants gather all the tips and divide them equally at the end of the day. (This is known as tip splitting or tip pooling). In many cases, servers will go home with cash payments each day and receive the rest of their compensation through direct deposit. Form W-4  determines the amount of income taxes withheld from each employee’s payroll, which will differ based on individual circumstances and state regulations. Nyou must withhold:

• Social Security Tax
• Medicare Tax
• FUTA

Many states also have state income tax, and you’re also obligated to pay federal income tax. In some areas, there are even additional local taxes. Check out our article on payroll taxes to learn more about your obligations.

Calculate the Cost of Labor Along with Gross and Net Payments

The restaurant-specific payroll and HR process is one gigantic picture that begins with gross pay and labor cost. Labor costs cover up to 35% of overhead in the restaurant industry and consist of the following:

• Sick and vacation days
• Payroll taxes
• Salary employee wages
• Hourly employee wages
• Healthcare
• Overtime
• Bonuses

Labor cost is the overhead that is the most tedious to handle in paperwork. Factoring in gross pay to each employee with different circumstances regarding tax withholdings is a headache for any restaurant owner. The good news is that if you use a smart payroll system like Homebase, all you have to do is fill out each employee's information —and the system does the rest to deliver the correct net payment.

Store Payroll Records

The government requires you to maintain your restaurant payroll records for at least three years unless you:

• Do not report income that is more than 25% of the gross income shown on your return, keep them for six years.
• Do not file a return, keep them indefinitely.
• File a fraudulent return, you should also keep them indefinitely.

The government has strict regulations about how you need to store your records and employee information. Take a look at this guide from the Department of Homeland Security to learn more. A good payroll system (like Homebase) includes a storage feature that allows you to maintain your payroll records safely and securely for as long as you need.

Choose Homebase

Homebase is a software system that operates as your entire HR department. Every employee’s necessary details are stored securely in our cloud-based platform, including:

• Social Security number
• Tax information
• Hours worked
• Breaks
• Vacation time
• Tips
• Wages
• Payment cycle

It works by putting the employee's information in the system, along with Forms W-4, and letting the platform handle the rest with the hours worked and tips received. The information put in gives an accurate calculation that works on each payroll cycle. Everything mentioned in this article that is needed for taxes, payroll, insurances, tips, employee information, and more, is taken care of in Homebase’s restaurant payroll software—it’s the perfect payroll solution. From a legal standpoint, there is no way around running your payroll properly and submitting taxes contributed by both you and your employees. How you handle the complicated paperwork is up to you, but we recommend using payroll software like Homebase to maintain labor law compliance with ease. Sign up here today.

Setting Up Restaurant Payroll FAQs

What Is Restaurant Payroll?

In the context of a restaurant, payroll encompasses the process of calculating and disbursing wages to employees within a certain timeframe. This involves a systematic approach to handling the financial compensation owed to restaurant staff.

How Do I Set Up Payroll for My Restaurant?

To initiate a payroll system in a restaurant, several steps are necessary. These include obtaining an Employer Identification Number (EIN), registering with relevant state labor authorities, establishing a payroll system that accounts for necessary withholdings, and ensuring all newly hired employees complete W4 and I-9 forms.

What Are the Key Considerations for a Restaurant Payroll System?

When setting up a restaurant payroll system, various factors need consideration. These include comprehending various tax withholdings such as federal and state income taxes and FICA taxes. Additionally, establishing a distinct bank account for payroll purposes, determining a payment schedule, and selecting an appropriate payroll software for restaurants are important steps.

How Do I Calculate Payroll Taxes for My Restaurant Employees?

Calculating payroll taxes for restaurant employees involves withholding federal income taxes, determining state and local taxes where necessary, and understanding FICA tax obligations. Employers must also account for FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) taxes.

What Should I Know About Tip Reporting and Payroll?

For restaurants, managing tip reporting in payroll is a critical aspect. This includes maintaining a system for tracking and declaring tips as taxable income, particularly when they exceed $20 per month. Compliance with regulations regarding tip credits and labor laws for tipped employees is also essential.

How Do I Handle Overtime Pay in a Restaurant?

Handling overtime pay in a restaurant involves segregating regular hours from overtime hours. The overtime pay rate is then calculated by applying the correct overtime multiplier to the regular pay rate.

What Percentage of Revenue Should Go Towards Payroll?

It is often suggested that between 20% and 35% of a restaurant's total revenue should be allocated for payroll. However, this percentage may vary depending on the type and structure of the restaurant.

How Should I Pay Tipped Employees?

For employees who regularly earn more than $30 monthly in tips, payment should adhere to federal and state minimum wage laws. This includes accounting for any tip credits that may apply under these laws.

What Are the Regulations Around Automatic Gratuities?

Regulations state that automatic gratuities, such as those added to bills for large parties, are treated as revenue for the restaurant. This distinction affects the taxation process for these amounts, as they are not considered tips for servers.

How Do I Choose the Right Payroll Software for My Restaurant?

Choosing appropriate payroll software for a restaurant requires evaluating several factors. These include the software's capability to integrate with other systems, like restaurant scheduling tools, its features for efficient payroll tracking and calculation, and its adherence to relevant legal and regulatory requirements.