| To meet the federal minimum wage threshold of | Owners can pay tipped employees a base salary of | If the employee also earns tips at a rate of (at least) |
|---|---|---|
|
$7.25 per hour |
$2.13 per hour |
$5.12 per hour |
Payroll
How to Run Payroll for Restaurants
Master restaurant payroll challenges like compliance, tipped wages, and multi-role pay — all served up in one helpful article.
Managing payroll for restaurants involves a lot more than cutting checks — it means navigating a complex web of wage laws, tax credits, compliance regulations, and much more.
Whether you’re opening your first restaurant or own multiple locations, running payroll can be intimidating. The complicated patchwork of laws can make staying compliant difficult without having the right system in place.
Key Takeaways
- Understand the layers of compliance: Payroll for restaurants involves navigating federal, state, and local laws, including minimum wage, tip credits, overtime, and scheduling regulations. Staying compliant requires constant adjustments as laws evolve.
- Account for industry-specific challenges: Managing tipped employees, multiple pay rates, and varying payroll schedules adds complexity to restaurant payroll. Accurate tracking and detailed record-keeping are essential to avoid errors and penalties.
- Leverage tools to simplify payroll: Modern systems can automate calculations, integrate with POS systems, and ensure compliance, helping restaurant operators save time and reduce the risk of costly mistakes.
Restaurant Payroll Laws
The Fair Labor Standards Act (FLSA) of 1938 created many of today’s most common workforce standards, such as minimum wage, overtime pay, hours worked, and child labor. Other relevant legislation includes the Occupational Safety and Health Act (OSH Act), Employee Retirement Income Security Act (ERISA), and Family and Medical Leave Act (FMLA). The OSH Act focuses on maintaining a safe work environment for employees. ERISA regulates employee benefit plans. FMLA mandates organizations with 50+ employees to provide protected leave in case of personal illness or that of a dependent.
Minimum wage requirements differ depending on the state, county, or city of employment, and tipped wages add more complexity. Under the FLSA, employers can use a portion of employees’ tips to reduce the minimum wage they’re required to pay — known as a tip credit. Yet some states ban the practice altogether, while others allow only a reduced tip credit if certain wage and benefit conditions are met.
With many jurisdictions increasing wage rates each year, restaurant operators must continuously adjust their payroll systems to stay compliant. Add in scheduling laws — like those that ban predictive scheduling in some states — and owners face a constantly moving target. What works in one location might be a compliance risk in another, creating a frustrating environment for HR and finance teams trying to stay ahead.
How to Set Up Restaurant Payroll
1. Complete the necessary paperwork
This includes deciding:
- Whether to structure your business as a limited liability company (LLC), corporation, partnership, or sole partnership.
- Registering to obtain a Federal Employer Identification Number (FEIN) and state EIN.
- Reporting all new hires to the state and having them complete their I-9 and W-4 forms.
- Purchasing worker’s compensation insurance (requirement can vary by state.)
- Determining which payroll tax forms to file each week, month, quarter, or year.
2. Calculate how much revenue should go to payroll
The ideal percentage of total revenue to devote to payroll is between 20-35%. Less expensive or fast-food restaurants may want to use a lower percentage, while high-end establishments may want to use more, given their higher quality offerings and staff specialization.
3. Create a payroll schedule
A restaurant’s payroll schedule is influenced by what state you’re located or operating in, any state regulations for tipped workers and the restaurant industry, how employees are compensated (hourly or salaried), and if any employees are eligible for overtime (exempt or non-exempt).
4. Know how to pay tipped employees
The FLSA defines tipped employees as, “…individuals engaged in occupations in which they customarily and regularly receive more than $30 a month in tips.” It’s imperative to use an accurate reporting system that tracks exactly how much employees earn in tips each shift and to fulfill federal and state minimum wage requirements.
Most restaurant owners may use these tip earnings to offset the base wage they directly pay employees when fulfilling federal and state minimum wage requirements. If using this tip credit method, employers must pay tipped employees a base wage of at least $2.13 per hour.
Account for multiple pay rates
Employees sometimes perform multiple roles with different wage rates. Accounting for multiple pay rates by tracking exactly how many hours an employee works in each role is important to ensure payroll accuracy.
Set up direct deposit
While optional in many states, depositing an employee’s wages directly to their bank account saves both them and you time and effort. Employees must provide their Automated Clearing House (ACH) information, which includes their routing and account numbers.
Keep detailed records
Most restaurants store payroll records for three years, unless there are circumstances such as misreported income or failing to file tax returns, in which case owners should keep records for at least six years, and sometimes indefinitely.
How to Run Restaurant Payroll
After employees submit all timesheets and tip reports, either in print or digitally, owners can begin calculating the various amounts needed to complete the payroll process.
1. Calculate gross pay
Gross pay is the total sum an employee earns over the course of the pay period. For hourly employees, this is calculated by multiplying the base wage by the number of hours worked, while for salaried employees, it’s found by dividing their annual salary by the total number of pay periods in the year.
Did the employee perform multiple roles with different pay rates? If so, rates, amounts, hours worked, etc. for all their roles must be included when calculating gross pay.
If an hourly non-exempt employee worked overtime, a minimum 1.5x multiplier must be included. If a tipped employee works overtime, the employer must pay the employee at least 1.5 times the minimum wage, then subtract the tip credit to come to the employee’s direct cash wage.
2. Calculate tipped pay to meet minimum wage
Confirm if tipped employees’ paychecks will fulfill the minimum wage threshold for your state. If their combined base wage and tips don’t meet that threshold, you must make up the difference.
3. Calculate deductions and taxes
Voluntary pre-tax deductions may include health insurance premiums or retirement contributions. The most common federal payroll taxes are Social Security, Medicare, Unemployment, and Income.
The specific amounts due for these taxes will also vary based on the employee’s earning that pay period both in direct wages and tips. The IRS considers tips to be taxable income and the total income from tips reported to an employer must equal at least 8% of the business’ total receipts for that pay period.
4. Calculate and deposit net pay
Subtract all withholdings, garnishments, federal, state, and local income taxes, and federal Social Security and Medicare taxes from the total gross pay.
Forms for Filing Restaurant Payroll Taxes
- Form 940: Annually filed form due every Jan. 31 that reports the federal unemployment taxes your restaurant paid.
- Form 941: Quarterly filed form due every April 30, July 31, Oct. 31, and Jan. 31 that reports the federal Social Security, Medicare, and income taxes your restaurant paid or remitted.
At the state level, most restaurants must file similar forms regarding withheld payroll taxes, unemployment taxes, and workers compensation insurance. It's very common for these forms to be submitted quarterly, but their names and specific due dates can vary, so it’s important to familiarize yourself with your state’s requirements.
How to Choose a Restaurant Payroll Provider
Successful payroll management takes in-depth knowledge of labor laws and a human capital management (HCM) system built to keep up. As wage laws continue to evolve and labor expectations rise, restaurants need flexible tools that adapt quickly and reduce the risk of costly mistakes.
Modern HCM systems simplify payroll and compliance by automating complex processes and minimizing errors. They enforce rules for time keeping, overtime, pay changes, and shift differentials to ensure accurate pay across schedules. When integrated with a POS system, punch data flows directly into payroll, creating a single source of truth and greatly reducing manual entry. This improves accuracy and makes it easier for restaurants to offer higher pay for holidays or late shifts through automated rules.
By investing in technology that streamlines pay calculations and supports legal compliance, owners and operators can focus less on ever-changing regulations and more on serving their people and customers well. But today’s solutions offer much more than efficient payroll processing and time keeping. Restaurants can also take advantage of an integrated, all-in-one platform with features like:
- Benefits administration: Attracting skilled workers and reducing employee turnover is critical for restaurants to run efficiently, and offering competitive benefits can help differentiate you as an employer.
- Recruiting and onboarding: Streamlined referrals and a mobile-friendly application process help you bring in top talent, while digital onboarding lets new hires complete pre-boarding tasks and upload needed documentation on their phone so they’re ready to start day one.
- Data analytics: Real-time workforce data and dashboards that display headcount, turnover, scheduling patterns, and labor costs by location empower managers to make smarter staffing decisions.
- Mobile flexibility: A mobile-first approach means more than just letting employees view their paystub or ask for time off — it facilitates meaningful connections between employees, managers, and the business.
Having a unified system can help you maximize productivity and profits, save much-needed time and energy, reduce stress, and enhance your culture.
Let Paylocity Take a Bite Out of Manual Tasks
Whether you’re bagging burgers or plating filet mignon, Paylocity is the perfect partner for your restaurant’s organizational needs. Along with the most complete platform for the modern workforce, we deliver white-glove service for the service industry and work closely with clients to help them achieve their specific and unique goals.
“One of the best parts we love about Paylocity,” said Kristen Sandhurst, CFO at Taco Johns of Iowa, “is that they’re continually developing and releasing new features, so we’re really excited about things coming in the future that will help us scale up even more as we continue to add more restaurants.”
Now serving...YOU!
Request a demo today to learn how Paylocity can make running your restaurant payroll and other important tasks as easy as filling a drink order.
Save Time with Stress-Free Payroll Solutions
Payroll doesn’t have to be complicated, but it does have to be right. Stay compliant, collect employee data, and streamline tax filing – all while putting time back in your day with our automated payroll software. With the assurance of an error-free workflow, you can get back to what matters most – your people. Learn how our modern solutions get you out of the tactical and back to focusing on the bigger picture.
Related
Hiring for Restaurants
Unlock the secrets to hiring and retaining top restaurant staff with a blend of strategy, technology, and a positive culture.
10 Critical To-Do's on Your HR Year-End Checklist
Wrap up 2025 with our HR year-end checklist. Discover expert tips for managing payroll, benefits, compliance, and more for a smooth transition into 2026.