Everything You Need to Know About Restaurant Payroll
You can't have a great restaurant without great staff. From the valet to the waiter to the cook to the cleaner, each of your employees helps to create the perfect customer experience.
So, it stands to reason that you need to create the best possible employment experience for your people. And how can you do that? There are several ways, but the primary concern of restaurant staff is that they get paid. Paychecks should arrive on time, and they should be for the correct amount.
Making this happen is harder than it sounds. Restaurant payroll can be phenomenally complicated. You had to think about a wide range of issues, including:
Minimum wage laws
Meals provided to employees
Overtime and scheduling
Sometimes, it's easier to bring in an expert to manage this for you, rather than try to untangle this by yourself. Either way, you'll need to start by understanding the core concepts involved. With that in mind, here are some of the main issues related to restaurant payroll.
Like most branches of the service industry, restaurant staff often earn something around the minimum wage. As an employer, you need to understand how minimum wage rules work and how they affect restaurant payroll:
What Is the Minimum Wage?
The federal minimum wage currently stands at $7.25 per hour.
Individual states also have their own minimum wage rates, as do some cities and localities. All of these rates can change drastically, and in some places the minimum wage is inflation-linked, which means that the rate automatically increases each year.
Keep track of the changes and remember -- you have to pay your staff the highest applicable minimum wage rate.
Who Qualifies for Minimum Wage?
Anyone covered under the Fair Labor Standards Act (FLSA) should receive the minimum wage. People under the age of 20 can earn a lower rate of $4.25, but only for the first 90 days of employment.
There are FLSA exceptions, such as a business with under $500,000 turnover and no interstate transactions. Employers can also apply for certain exemptions, such as when hiring staff with disabilities. But even if FLSA does not cover your people, there might still be other state and municipal minimum wage rules that apply.
Note: Tips can impact the effective minimum wage -- see the Tips section below for more details.
What Happens If You Pay Less Than Minimum Wage?
Employees can sue you if you haven't paid them correctly. Depending on the jurisdiction, they may be able to sue for backdated pay, legal fees, and additional damages.
You may also receive a punitive fine. Plus, there's the damage to your reputation and company morale that comes from not paying your people properly.
Tipping makes up the majority of income for most customer-facing restaurant staff, and this has a substantial impact on how you calculate restaurant payroll.
Tipped vs. Non-Tipped Employees
FLSA and other laws make a clear distinction between tipped and non-tipped staff. Anyone who regularly receives more than $30 per month in gratuities -- either from customers or fellow employees -- is a tipped employee.
FICA Tip Credit
Tips can count towards a tipped employee's salary. This is important when working out your obligations regarding minimum wage.
FLSA rules recognize what's known as the FICA tip credit. That's the net amount of tips that an employee earns, worked out on a per hour basis and with an upper limit of $5.12 per hour.
So, say you have an employee who earns exactly $1 per hour in tips. You need to pay that person a minimum of $6.25 per hour, bringing their total earnings to $7.25.
If you have another employee who brings in tips worth $10 per hour, you can count $5.12 of that as FICA tip credit. You then need to pay that person $2.13 per hour to bring them up to minimum wage.
This rule only applies to tipped employees and has the same regional variations as other minimum wage laws.
Cash Tips vs. Card Transaction Gratuities
More and more customers are settling their bill by card. They often tip by card as well, as most card payment systems allow the customer to include a gratuity in the total.
You need to forward these tips to the employee before the next regular payday. As card transactions are subject to a transaction fee, it's okay to deduct an appropriate amount from the tip to cover that transaction fee.
However, you can't include transaction fees in the FICA tip credit. So, say you have an employee who earned exactly $5.12 per hour in tips, and you apply a $0.12 deduction to cover transaction fees. That brings the FICA tip credit to $5, which means that you need to pay $2.25 to bring them up to minimum wage.
Service Charges vs. Tips
If you add a fixed amount to a bill -- for example, a 15 percent service charge for large groups -- then this amount is not classified as a tip. It's part of the total bill and therefore a payment to you, the owner.
You can choose to distribute service charges amongst your employees if you wish, but this constitutes a salary payment, and you process it in the same way as all other salary payments.
The IRS makes a simple distinction between service charges and tips, which is that a tip is voluntary, and a service charge is not. Service charges are a fixed, non-negotiable part of the bill.
Customers might pay the service charge and then choose to leave an additional tip. If so, the extra amount is a tip.
Until recently, no legal provision allowed tipped workers to share their tips with other staff.
The law has changed, and tip pooling is now officially recognized. Usually, this means that tipped staff surrender some or all of their tips into a single pot, and everyone splits the pot between them. It's a great way to share tips with non-customer-facing staff like cooks, cleaners, and bussers.
You can apply a FICA tip credit to staff who benefit from this practice, but each individual must still earn minimum wage in all circumstances. For each person, the tip credit is a factor of the net amount of tips that they take home -- their donation to the tip pool doesn't count.
Meals Provided to Employees
Contrary to what you might have heard, there is such a thing as a free meal. You can offer food to your employees in a way that's free for them and deductible for you, although there are rules regarding employee meals:
What Counts as an Employee Meal?
To qualify as an employee meal, the food must be:
Provided on the employer's premises.
Consumed during, before, or after the employee's working hours.
Offered to help employees meet their working schedule (i.e., if it would be unreasonable for them to go to another restaurant during their lunch break).
The food consumed has to be of a reasonable value as well, so the Kobe beef with an aged Merlot doesn't really count.
If an employee comes to the restaurant outside of their normal working hours, you should treat them as a customer. This is true even if you offer them an employee discount on their meals -- the discount is not taxable.
Are Employee Meals Subject to Tax?
Unlike some perks and benefits, employee meals are 100-percent non-taxable. You can provide employee meals each day without it affecting their payroll in any way, as long as it meets the criteria above.
Are Employee Meals Deductible?
Yes, these meals are also 100-percent deductible for you, the employer. Make sure that you record every meal so that you can include everything in your tax return.
De Minimis Meals
Speaking of deductions, it's also worth noting that you can include small, occasional treats on your tax return, even if they don't meet the employee meal criteria. This is when you buy coffee and donuts for a meeting, for example, or you order takeout for staff who are working late. Employees don't have to declare donuts on their tax return, so these meals don't impact payroll.
Overtime and Scheduling
Staffing levels present a major challenge to restaurant owners. You often find yourself begging people to do overtime when the place is busy, or telling them to go home when it's quiet. This can have a severe impact on your payroll.
When Do You Pay Overtime?
FLSA rules require employers to pay overtime to any employee who is working over 40 hours per week. As ever, there are state and local laws that can make these rules more complicated, so be sure to check overtime rules in your area.
The federal overtime rate is 150 percent of an employee's normal rate, not including FICA tip credit. That means that someone on FLSA minimum wage of $7.25 will get an overtime rate of $10.88.
Overtime is only applicable to the additional hours worked. For example, if someone has racked up 50 hours in one week, you'll pay:
40 hours at the normal rate.
10 hours at the overtime rate.
How Does the FICA Tip Credit Impact Overtime Payments?
Under FLSA rules, you can continue to apply tip credit at the normal rate to overtime payments. The FICA tip credit is still capped at $5.12 for overtime payments, however. So, if an employee is getting the overtime rate of $10.88, you will have to pay them the remaining $5.66 for each hour worked.
What Are My Scheduling Obligations?
There are no federal requirements concerning staff schedules -- so far. On a municipal level, however, there is an emerging trend of fair scheduling laws that force employers to compensate workers for erratic scheduling.
For example, the Secure Scheduling Ordinance in Seattle says that employers must post schedules 14 days in advance. If you make changes to the shift plan later on, you have to compensate staff for the disruption. That means an additional hour's pay as a bonus for working an extra shift at short notice. If you cancel a regular shift, you have to pay the employee half of their normal earnings for that shift.
We've covered most issues related to an employee's gross salary. Sadly, the gross amount is never what actually appears in our paycheck, thanks to deductions. Here are a few that you need to think about:
Deductions for Costs
You can make discretionary deductions from an employee's wages for a uniform, for meals, or any other business expense. But remember -- you still have to pay minimum wage after all deductions. If the cost of a uniform brings an employee down to less than $7.25 an hour, that's not legal.
Withholding for Tax
To calculate tax, you have to look at the total earnings of the employee. That means base salary plus tips. Generally, you will calculate the employee's tax liability, such as income tax, Social Security and things like Medicaid. You will then retain the appropriate amount from their salary and remit these payments in the same way as you do for every other employee.
Documentation is key when it comes to taxation. As well as completing W-2s, you need to keep full records about everything related to payroll -- everything from payslips to dockets for employee meals. Assume that the IRS will audit you. That will make it easier to prepare if you do, in fact, get an audit notice.
You're only legally required to offer health coverage if you have over 50 full-time employees. The definition of full-time is someone who regularly works over 30 hours per week or 120 hours per month.
Of course, you can still choose to offer benefits such as health care to any of your staff. If you do, check that the plan is pre-tax eligible. This means that you can deduct the premium from the employee's salary before calculating taxes
What Happens If the Base Wage Doesn't Cover Taxes?
Sometimes, the amount that you withhold for taxes may not be enough to cover the whole of the employee's tax liability. This can happen when an employee's salary is low, but they earn a lot of money through tips.
If, at the end of the year, the amount withheld is still less than the amount owed, then you need to note the deficit on the employee's W-2. Make sure that employees know if they have any outstanding taxes to pay.
How to Handle Restaurant Payroll
A restaurant can't work without the right staff.
That's true in the front of house, it's true in the kitchen, and it's also true in the back office. Don't try to manage restaurant payroll without help.
Talk to a skilled accountant with restaurant experience. They can help you figure out how to meet your obligations, stay compliant, avoid tax issues, and -- most importantly -- make sure that your staff gets paid fairly and on time.