Restaurant payroll: how to set it up for your business

Anyone who’s managed a restaurant will tell you that it’s a complicated business. There’s complex inventory management requirements, full- and part-time schedules to juggle, and razor thin profit margins.

Restaurant payroll is no easier. It requires business owners to regularly calculate and process payments for various employee types. Oh, and let’s not forget about tip payments. There’s a lot to know, and a lot to cover each pay cycle. This article will help make sense of it all.

What is restaurant payroll?

Restaurant payroll refers to the tasks and processes involved with paying restaurant employees. This includes tracking hours worked, calculating wages and tip payouts, distributing paycheck, withholding and filing taxes, and keeping accurate records.

Each of these tasks is critical to ensuring that employees are paid their proper wages, and that the restaurant is complying with all required labor laws and regulations, and tax requirements for their business.

Restaurant payroll can be quite complex, due to the various types of employees that these businesses employ, and how each type is paid. This type of business is also regulated in the United States under the Fair Labor Standard Act (FLSA), which governs minimum wage, overtime pay, and regulations related to tip management and pooling.

Understanding how to set up and run restaurant payroll, therefore, is critical to remaining compliant. Luckily, this article will explain how to do that.

How do restaurants pay their employees?

Part of the complexity related to running payroll for restaurants is the many ways that these businesses pay their employees. Wages are calculated and remitted in a variety of ways, depending on the employee’s job status, job type, and position.

Generally, there are there variables that will determine how a restaurant employee is paid:

Whether they’re full time or part time
Whether they’re paid a salary or by the hour
Whether or not they’re eligible for tips

For example, managers are often full-time employees who also earn a salary. They make the same amount of money each pay run, regardless of hours worked. They’re typically not eligible for tips, but might earn periodic performance-based bonuses.

Employees like waitstaff, bartenders, bussers, and line cooks, on the other hand, are likely hourly workers with either part- or full-time schedules. These employees’ paychecks will likely vary, depending on the number of hours worked. They’re also usually entitled to tips, which fluctuate depending on the employee.

Under FLSA regulations, hourly workers are entitled to overtime pay, which is usually 1.5 times their hourly rate for any time worked over 40 hours per week. Both full- and part-time hourly workers are entitled to this pay.

How tips affect restaurant payroll

Tips are another layer of complexity in restaurant payroll. Generally, part- and full-time employees—unless they’re salaried—are entitled to tips. These are usually paid out in one of three ways:

Direct tips: Given directly to employees by customers. These tips must be reported and are subject to income tax.
Tip pooling: In tip pool, tips are collected and redistributed among tipped employees according to a predetermined plan. This ensures that all tipped employees receive a fair share. The FLSA permits tip pooling among employees who customarily and regularly receive tips, like waitstaff and bartenders. Managers and supervisors can’t participate in tip pools.
Tip credits: Employers can count a portion of the tips employees receive towards meeting the federal minimum wage requirement.

The federal minimum wage requirement is the final nuance to consider when paying restaurant employees. Under the FLSA, restaurant employers can pay tipped employees at a lower minimum wage—down to $2.13 per hour—as long as their total earnings meet the minimum wage requirement. If the employee’s tips plus wage amount does not meet that minimum, the restaurant need to make up the difference.

Because of these intricacies, payroll management in a restaurant means taking great care when calculating tips, overtime pay, and tax withholdings. It can be tricky, and it’s easy to get wrong. Good thing there are plenty of resources and tools to help. We’ll cover those throughout the remainder of the article.

Why you should set up restaurant payroll.

Properly setting up restaurant payroll—specifically the processes and policies that underpin each payment run to your employees—is critical for multiple reasons:

Your employees are paid on time and accurately, contributing to high morale and reducing turnover.
You’re complying with legal requirements, such as federal and state employees laws, minimum wage standards, and income tax regulations .
Your restaurant has financial management by accurately tracking labor costs, managing tips, and handling deductions.

Ultimately, a well-managed payroll process enables smoother operations for your business, ensuring that you can focus on the things that matter most to your customers.

What you’ll need to set up payroll for your restaurant.

Setting up restaurant payroll for the first time requires a bit of hustle and paperwork. Luckily, once it’s up and running, the recurring tasks are fairly consistent. Here’s a list of everything you’ll need to get in order before you start to run payroll.

Employer Identification Number (EIN)

An Employer Identification Number (EIN) is a unique, nine-digit number the IRS assigns to a business entity. This is what allows you to operate within the United States.

The IRS uses your EIN to identify your business for tax purposes, and you need this if you have any employees you’re running payroll for.

To get an EIN:

Visit the IRS website and navigate to the EIN application page.
Complete the online application form with your business details.
Submit the application and receive the EIN.
Wait to receive form CP-575 in the mail, which is your official confirmation letter from the IRS confirming that you’ve been granted an EIN.

Company bank account

A business bank account is essential for virtually any business, but it’s particularly important if you’re running payroll. This is where you’ll draw money to cover payroll runs, and it’ll help you keep all business expenses separate from personal ones.

To get a company bank account:

Choose a bank that offers business accounts with favorable terms.
Gather necessary documents, such as your EIN, business registration, and personal identification.
Open a business checking account specifically for payroll to separate it from other business expenses.
Connect your company bank account to relevant payroll software and other financial reporting tools.

Employment forms

As an owner or manager, you’ll need to ask new hires to sign employment forms, and then keep them in a safe place for legal and compliance purposes—we recommend online software to make things nice and easy. These forms contain important information for each employee that determine tax withholdings and eligibility.

Restaurant owners should, at least, provide all new hires with Form W-4 (Employee’s Withholding Certificate) and Form I-9 (Employment Eligibility Verification). Get your team to complete and return both forms before their first payroll cycle.

Employee handbook and policies

An employee handbook outlines payroll policies, procedures, and expectations, giving clarity and consistency for your team. It’s good practice to draft an employee handbook early, update it as necessary, and share it with new hires.

Employee handbooks should include information about payroll schedules, overtime policies, tip reporting, and any other relevant processes for tracking time worked and wages earned.

State and local registration

Registering with state and local tax agencies ensures compliance with regional tax and employment laws. Research the state and local requirements for employer registration and tax withholding for your area. Then, register your business with the appropriate state and local tax authority, and obtain the necessary permits and licenses.

Some resources to help include:

State government websites, including your Department of Revenue, Secretary of Stage, and Department of Labor.
Small Business Administration (SBA), which provides comprehensive guides and resources for small business owners, including links to state-specific requirements.
The IRS website offers resources and links to state and tax authorities. Check the IRS State Government Websites page for direct access to state-specific information.
Local chambers of commerce.
Legal and accounting professionals.

Record keeping processes

Before starting to process payroll, it’s important to establish a system for reliably storing payroll records. This is essential for compliance, taxing filing, and financial management purposes.

Create a system for tracking employee hours, wages, and deductions. You should also have a process in place for generating and storing pay stubs to keep ongoing records of amounts paid and deducted.

Software like Homebase helps with calculating and managing all of this, ensuring that payments are accurate, and that records are kept for the required duration as mandated by federal and state laws.

Payroll schedule

Once you have the foundational processes set up, you can now turn to setting a payroll schedule. (We know—the fun never ends!) This determines how often employees are paid, giving them consistent and timely payments, and allowing you to reliably plan your finances and keep your team happy.

Payroll schedules are typically either weekly, bi-weekly, semi-monthly, or monthly. You’re free to select whichever interval works best for your business, as long as it complies with state laws.

Once set, communicate the payroll schedule to all employees, including pay dates and cutoff periods for timesheet submissions.

Payroll software or service

At some point (we’re guessing pretty early on), you’ll likely realize that setting up and running payroll can be both complicated and time consuming. This is where a payroll software or service can help.

Once the foundation of your payroll has been set, software can take over the ongoing management by automating payroll calculations, filing and remitting taxes, and ensuring accuracy and compliance.

When selecting a payroll software, make sure it’s integrated with other systems you need to run your business, like time-tracking and accounting systems. Because if everything’s working together, you’re not only going to save time and effort, you’re also going to be able to reliably track and reconcile finances and working hours across all platforms.

Other considerations before running payroll.

Restaurant owners also need to take into account the following considerations before running payroll.

Tip reporting

Tip reporting is the process of tracking and reporting the tips earned by tipped employees. This is a major requirement for restaurants, and can be pretty complicated without the help of payroll software.

Employee pay rates

As mentioned earlier, restaurant pay types and rates can vary dramatically depending on the role and employment type. These rates need to be tightly aligned with time tracking software and payroll software to ensure that payouts and tax withholdings are automatically—and accurately—calculated each cycle.

Stay on top of setting employee pay rates for each type of employment to ensure that all workers are paid the right amounts, with the right combination of tips and wages.

Overtime pay

Likewise, some employees may be eligible for overtime pay. Tracking overtime pay and compensating at the right rate is a requirement under the FLSA. Again, this highlights the importance of properly tracking time worked against employment type and pay rates to ensure that your systems are reliably identifying and paying overtime hours worked properly.

How to do restaurant payroll in 10 steps.

Once you’ve set up your foundational payroll processes, you’re ready to start running regular payment to your employees. Here’s how that process typically works.

1. Collect and review timesheets.

First, gather all employee timesheets, ensuring they accurately reflect hours worked, including regular, overtime, and break hours. Verify all timesheets are approved by supervisors.

2. Calculate tips and gratuities.

Aggregate and calculate all tips received by employees, including cash and credit card tips. Make sure tips are properly reported and accounted for in payroll calculations.

3. Calculate gross pay.

Determine each employee’s gross pay by multiplying hours worked by their hourly rate. For salaried workers, gross pay should remain consistent each pay cycle, unless there is an additional performance bonus or raise added.

4. Apply deductions and benefits.

Next, subtract any pre-tax and post-tax deductions, including health insurance premiums, retirement contributions, and wage garnishments. This determines the net pay employees receive in their bank accounts.

5. Calculate payroll taxes.

Calculate the necessary federal, state, and local taxes to withhold from employee paychecks, including Social Security, Medicare, and unemployment taxes. Make sure employer tax obligations are also calculated so that you can properly remit the right amounts to the IRS.

Want more help calculating your payroll taxes? Explore payroll taxes 101 and learn all the ins and outs.

6. Verify compliance with labor laws.

Check that all pay calculations comply with federal and state labor laws, including minimum wage, overtime, and tip credit regulations. Payroll software will help you automatically verify compliance, saving you time and headaches each pay cycle.

7. Run your payroll.

Use payroll software to process payroll and send the appropriate net payment amounts to each employee. This may involve generating paychecks or sending direct deposit transfers, depending on your payment policies.

8. Distribute pay stubs.

Provide employees with detailed pay stubs that outline their gross pay, deductions, net pay, hours worked, and any tips received. Payroll software is a huge time saver here that creates and distributes paystubs automatically each pay cycle.

9. Submit payroll taxes.

Each pay cycle, it’s best practice to remit withheld payroll taxes to the appropriate federal, state, and local tax agencies. At the same time, you should file any required payroll tax report forms. With the right payroll software, you can automate this process, including collection, remittance, and form filing.

10. Maintain payroll record.

After each pay cycle, ensure that you keep accurate and secure records for all payroll transactions, timesheetings, tax filing, and employee pay details. If you’re ever audited, now you have a complete record of payments to verify your process and due diligence.

Payroll software for restaurants.

Whew. That all seems a bit overwhelming, right? There’s a lot to set up, a ton of laws and regulations to comply with, and a bunch of ongoing tasks to juggle. We told you restaurant payroll was complicated!

Enter: payroll software. It’s purpose-built to automate and streamline all of the steps we’ve outlined in this article. A restaurant payroll platform like Homebase, for example, manages various aspects of payroll, including tracking employee hours, calculating wages (including tips and overtime), withholding taxes, and ensuring compliance with labor laws.

Additionally, it can automate tax filings, generate detailed pay stubs, and handle direct deposits, significantly reducing administrative workload and minimizing errors. By using payroll software, restaurant owners can ensure timely and accurate payment and maintain compliance. That means less focus on administrative tasks, and more on being the best darn restaurant in your area.