Calculating restaurant payroll can be complicated - but it’s important.
Paying your employees correctly will help you avoid any fees, fines and legal trouble - and will really boost the morale of your employees. After all, your employees are one of your most important assets in the restaurant industry!
Fortunately, payroll services can help you with this and make managing your restaurant payroll a lot easier.
Here are some important things for business owners to think about when it comes to restaurant payroll.
1. Are Your Restaurant Payroll Percentages Right?
What percentage of sales should payroll be in a restaurant? What percentage should food cost be? What is the average kitchen labor cost percentage? These are some important questions to ask yourself when you are figuring out your restaurant payroll.
Of course, every restaurant is unique and there will always be exceptions. However, understanding the typical percentages will provide you with an important starting point for evaluating the financial performance of your small business.
General rules of thumb can help you to decide whether your small business finances will be sustainable in the long term. First of all, consider the Prime Cost - which is the total cost of food, beverages and labor. This should be about 55-65% of sales. The remaining amount covers other restaurant industry expenses such as rent, advertising, insurance, utilities and other overhead costs (with the leftover amount being profit!)
Labor cost should be around 25-40% of the prime cost - but it depends on the type of restaurant. (For example, high-end restaurants provide more attentive service, certain types of food take more labor to make, etc.) The location also makes a difference - as minimum wage may be higher in your particular state.
2. Are Your Employees Classified Appropriately?
Another one of the most important things restaurant owners should know when it comes to restaurant payroll is the correct classification of employees. Improper classification of overtime exempt employees could really affect your bottom line.
Check the regulations and minimum wage laws set forth in the Fair Labor Standards Act. Unless they are exempt, employees who are covered by the FLSA must be paid overtime for the hours they worked over 40 in a workweek - at a rate of no less than time and a half their regular pay.
If your employees are paid a set salary rather than an hourly wage, they meet the minimum required amount of pay for exempt employees and they perform management, administrative or professional duties, they may be exempt from receiving overtime.
Don’t forget to consider tipped employees. Tips can impact the effective minimum wage (which we’ll cover in the next point.)
3. How Do Tips Affect Payroll?
The Fair Labor Standards Act makes a distinction between non-tipped and tipped employees. The rule is that anyone who regularly receives more than $30 per month in gratuities (either from customers or fellow employees) is considered a tipped employee. Tips can count towards a tipped employee’s salary - in the form of tip credits.
So, how do employee tip credits work? The FLSA recognizes the tip credit. That’s the net amount of employee tips, which works out on a per hour basis with an upper limit of $5.12 per hour. The goal of the tip credit is to ensure that restaurant owners are reporting their employee tips accurately.
So, for example, imagine your tipped employee makes $1 per hour in tips. In order to bring their total earnings to the federal minimum wage of $7.25 per hour, you’ll need to pay them at least $6.25 per hour.
If your employee brought in $10 per hour of tips, you can count $5.12 of this toward their tip credit. Therefore, you’d need to pay them $2.13 per hour in addition to this tip credit to bring it up to minimum wage.
Be sure to check for your state law on tip credit amounts, or if they are prohibited by the state.
Is tip income taxable?
Yes, tips totalling $20 or more in a month are subject to federal income tax and FICA taxes. The employee may receive the tips, but you will need to receive information about those tips so you can include them on their W-2 form. You'll also need a W-4 form with your employee's social security number and full name whenever onboarding a new hire.
Also, tip income is subject to the additional Medicare tax for higher income employees. You’ll need to start by withholding the additional 0.9% Medicare tax when employee compensation reaches $200,000.
Make sure you’re calculating payroll taxes properly by instituting a proper tip reporting system. If you are taking a tip credit, your tipped employees will need to report their tips to you on a daily basis to ensure compliance with minimum wage laws. The employee reports their tips monthly for tax purposes.
In the restaurant industry, sometimes employee's tips may be pooled and divided among the kitchen and front of house staff. If this is the case, check the laws for your particular state regarding tip pooling laws and arrangements.
4. What Are Your Restaurant Payroll Deadlines?
It’s crucial to be aware of the deadlines for depositing income taxes and payroll taxes - as you don’t want late penalties, interest charges or jail time for violating the IRS tax law.
Plus, paying your employees promptly makes them happy and shows you care about them and will improve morale. To make it easier for your small business to never miss a payroll deadline, it helps to automate your payroll processing with software like Hourly.
“I’ve been searching for ways to automate my business and cut down on mistakes,” said Israel Rind, owner of Izzy’s Brooklyn Bagels in a recent case study. “Hourly’s seamless platform is optimizing technology in new ways, saving us money and frustration.”
Bader Khalil, general manager of Mediterranean Wraps (see case study here), also found that using a simplified time tracking system helped to save time and meet deadlines.
5. How Should Small Business Payroll Records Be Kept?
The forms your restaurant employees complete when they are hired, the amount of tips they report and the records for every pay period should all be stored. The best way to keep your records is via payroll software in the cloud, so that they won’t be lost and can be easily accessed when you need them.
Also, restaurant owners must keep records of how they determined wages for at least two years. This includes time cards that comply with FLSA timekeeping requirements. Payroll software can make this easier, as records are kept automatically.
To read more about the recordkeeping and reporting requirements of the FLSA for your small business, you can click here.
Take initiative with your restaurant payroll.
Finding the right payroll solution and ensuring your payroll complies with labor laws will help keep your restaurant running smoothly. To make it easier, choose a payroll system that makes it simple to calculate everything, so you can have more time left over for running your business.