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This guide about how to do payroll will teach you – restaurant owners, operators, and managers – the in’s and out’s of calculating, distributing, and processing payroll for your employees. The following 6 steps outline the restaurant payroll process from beginning – collecting the necessary legal paperwork from staff – to end – storing payroll and tax related documents after conducting payroll in your restaurant.
This guide is purely informational; for the most accurate, reliable payroll and payroll tax related advice, consult an accountant or contact the Internal Revenue Service (IRS) directly.
What is Payroll?
Complete the Legally Required Payroll Paperwork
How to Create a Payment Schedule for Your Restaurant
How Restaurants Should Calculate Payroll Taxes
How to Choose a Restaurant Payroll System
How to Calculate Gross Pay, Net Pay, and Labor Costs
How Long to Keep Payroll Records and Conduct Proper Documentation
Payroll is a multi-use business term that refers to the people who receive pay from a company, the wages that are paid, or the process of paying employees.
Here are some examples of "payroll" used in a sentence:
Using the term "payroll" to refer to individuals employed by a business: “Tessa is on the payroll.”
Using the term "payroll" to refer to the amount paid to employees during a given fiscal period: "Payroll increased 2% this year."
Using the term "payroll" to refer to the act of calculating and distributing wages: “Ugh, that’s another eight hours of my life wasted doing payroll.”
This payroll guide will predominantly refer to the term "payroll" as the act or process of calculating and distributing wages to restaurant employees.
Doing payroll is a sizable investment of time, money, and resources for business owners. The complexities around staying legally compliant and paying your staff on time can add an extra layer of stress. In the food and beverage industry, restaurant owners and operators must also factor in industry-specific laws related to employee scheduling and tipped wage workers.
But just how sizable of an investment are we talking here?
According to The National Restaurant Association, there are 15.1 million people employed in restaurants in the United States. The restaurant industry generated roughly $800 billion in sales this past year. Given the average restaurant labor cost is between 30 – 35% of a restaurant's monthly revenue, we can estimate that the restaurant industry spent approximately $280 billion on payroll last year.
That’s a lot of bread.
The average tenure of a restaurant employee is one month and 26 days, with managers lasting an average of four months and four days. This means restaurant owners, operators, and managers spent a disproportionate amount of time setting up staff members in their chosen solution only to turn around and lose that employee a short while later.
Restaurant owners, managers, and leaders are left wondering: How can I attract new talent and hold onto the staff I already have? How can I spend less time on timesheet approvals and navigating payroll and HR compliance and more time keeping my staff happy?
Chris Comparato
Toast Inc.
Since restaurant payroll ranks high on the list of weekly priorities for restaurant owners, operators, and managers, it’s a good idea to make sure you understand the process from start to finish in order to stay legally compliant.
This guide is purely informational; for the most accurate, reliable payroll and payroll tax advice, consult an accountant or contact the Internal Revenue Service (IRS) directly.
The following section is an overview of the payroll-related paperwork you can expect to encounter as a restaurant owner or the person who does payroll for a restaurant. It's provided for informational purposes only and not for the purpose of providing legal, accounting, tax, career or other professional advice. Payroll paperwork and the processes around it will vary from state to state, so for detailed instructions and advice about how to approach payroll paperwork and taxes in your area, consult with an accountant or The Internal Revenue Service (IRS) directly for the most accurate information.
The process to get your restaurant set up to be able to conduct business, employ people, and be able to pay them wages involves making a number of key business decisions and filling out the corresponding paperwork on both the state and federal levels.
Below is an abbreviated checklist from the brilliant minds at Nolo, aimed to help you get your business up and running and ready to do payroll.
Get an Employer Identification Number (EIN): An EIN will serve as your business’ tax identification number when you’re filing taxes for your business. It's your identifier for any paperwork related to the IRS and the Social Security Administration. It will be in the format XX-XXXXXXX. Use your EIN only for documents related directly to your business (and never in place of your Social Security Number). You can apply for an EIN online here. The form used to request or apply for an EIN is called an SS-4 form.
Register your restaurant as an employer with your state’s labor department: Find your state’s labor department here. You must register your business with them to be able to pay mandatory state unemployment compensation taxes.
Get worker’s compensation insurance: Worker’s compensation insurance protects your employees in case they're injured on the job at your establishment. It’s mandatory in most states. You can find more information about worker’s comp insurance here.
Set up your payroll system with required withholdings: If you choose to invest in restaurant payroll software, potentially Toast Payroll and Team Management, or a service to facilitate payroll in your restaurant, you will need to withhold a percentage of each employee’s income for federal (and sometimes state) taxes, and to make payments into social security, Medicare, and FICA (Federal Insurance Contributions Act). For more info, check out the IRS document Publication 15.
Have all new employees fill out W4s: Whether you're opening a new restaurant or hiring a new employee into an existing restaurant, everyone on your staff will need to complete a W4. W4s are the forms that help you calculate how much federal tax you’ll have to withhold from a specific employee’s paycheck. You’ll need each employee’s social security number and full name to fill out a W4 form.
Have all new employees fill out an I-9: As with W4s, every employee within your restaurant will need to fill out an I-9 before they're allowed on the floor or on the line. This form is submitted to U.S. Citizenship and Immigration Services (USCIS) to verify a new employee’s work eligibility.
Report all new employees to state new hire registries: New hire registries exist to help the state locate employed parents who owe child support.
Outline your restaurant payroll policy in an employee handbook: Creating an employee handbook is a great opportunity to think big-picture about your company culture, what kind of boss you want to be, what you’ll expect from your employees, and what policies you want to put in place. It’s also important to outline your payroll protocol in your handbook so that no one is met with any surprises on payday.
Make a file for each employee: It’s a great idea to keep a file on each employee where you store their tax forms, their bank account information, and any additional paperwork they have to fill in, including certifications (like a food handler’s certificate or an alcohol serving safety certification). There are specific laws around how employers must store personally identifiable information (PII), so make sure whatever method you choose to store employee information is safe, secure, and legally compliant.
Set up employee benefits: According to Paychex.com, if your business employs more than 50 employees, you will be required to provide certain benefits to all your full-time staff, including healthcare and unpaid family or medical leave. Other benefits, like paid time off, 401k, and profit sharing are up to the discretion of each employer.
Research which forms you'll need to submit to the IRS and when: Form 940, for example, is filed once a year and exists “to report your federal unemployment tax for any year in which you paid wages of $1,500 or more in any quarter or for any year in which an employee worked for you in any 20 or more different weeks of the year.” For the full list of IRS tax forms, please refer to step three below
If throughout the process of setting up your restaurant’s payroll operations you find yourself totally overwhelmed, consider hiring an accountant or bookkeeper or consulting with a lawyer. Getting the opinion of a professional before major problems arise can save you a much bigger headache (and possible fines) in the long run.
Another consideration for all employers, regardless of industry, is labor law compliance. Labor laws exist to protect employees from exploitation and poor working conditions. According to the The Department of Labor, some of the most commonly referenced laws they enforce are as follows:
The Fair Labor Standards Act (FLSA) enforces minimum wage laws and overtime laws, which both vary by state. This applies to all restaurants.
The Occupational Safety and Health Act (OSHA) requires employers to provide a work environment free of recognized serious safety hazards. This applies to all restaurants, but additional regulations can vary state by state.
Employee Retirement Income Security Act (ERISA) manages the requirements of employers who provide retirement benefits to employees.
Family and Medical Leave Act (FMLA) enforces that companies with 50 or more employees (within a 75-mile radius of the worksite) give job-protected medical or family leave to all employees in the case of their illness, or the illness of a spouse, child, or parent.
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Now that your restaurant is legally allowed to employ staff and pay them wages, it’s time to decide on your restaurant pay cycle.
When it comes to deciding on an employee payment cycle, most businesses choose to pay their employees every two weeks — either with a check or via direct deposit (that comes with a printed receipt). But every business is different: Some pay their employees once a month or weekly; the choice is entirely up to you and what makes sense for your restaurant.
It’s important to note that a pay cycle applies to the base wage that tipped wage workers are paid as well as salaried workers. Tipped wage employees — like servers and bartenders — take home their tips at the end of a shift, often in cash.
Most positions in a restaurant are paid hourly, with the exception of management, executive chefs, and sometimes sous chefs. This is why it’s crucial to keep track of every employee’s hours without fail, because chances are, most paychecks will fluctuate every pay period.
It’s good practice to incorporate hours tracking into your staff training — clocking in and out is crucial, but encourage all staff to also keep a personal log of their hours worked in every pay period. This way, if there’s a big discrepancy for whatever reason, you’ll have a backup to check.
A direct deposit is a payment method you can use to pay your employees without them having to go to the bank to deposit a check (or use the online deposit functionality in their banking app). As the name implies, the money goes directly from your company’s bank account into the employee’s bank account.
To facilitate a direct deposit, restaurant owners, operators, and managers need to collect the employee's ACH billing information. This includes their account number and their bank's unique wire-routing number, typically available on their online banking websites or on the bottom of personal checks associated with a bank account. For more on how to set up direct deposit, check out The Balance’s page on the subject.
The team at MyAccountingCourse.com defines it as follows: “A payroll bank account is a separate checking account that businesses use exclusively to pay employees their payroll checks." It’s an attractive solution, because running a restaurant involves a lot of expenses, including many large and unexpected ones (like repairs), and you don’t want to reach the end of the pay period and realize your bank account doesn’t have enough in it to pay all of your employees. By keeping an account where you only deposit money that will be used to pay your employees, you have a better shot at keeping your books in order.
Fair scheduling, also known as predictive scheduling, secure scheduling, predictable scheduling, or restrictive scheduling, is a type of labor legislation that sets mandatory requirements for restaurant managers related to scheduling and overtime practices. Here are some examples of what fair scheduling or predictive scheduling laws may outline:
California, New York, and Washington currently have fair scheduling laws; more states are entertaining predictive scheduling legislation. If you’re in an area considering predictive scheduling legislation, it’s especially important to take time to research and familiarize yourself with the ways these changes may impact the way you approach restaurant scheduling, payroll, and overtime.
The following section is an overview of the payroll-related taxes you can expect to encounter as a restaurant owner or the person who does payroll for a restaurant. It's provided for informational purposes only and not for the purpose of providing legal, accounting, tax, career, or other professional advice. Payroll taxes and the processes around them will vary from state to state, so for detailed instructions and advice about how to approach payroll taxes in your area, consult with an accountant or The Internal Revenue Service (IRS) directly for the most accurate information.
Now that you've got your pay cycle and payment methods squared away, it's time to learn about restaurant payroll taxes.
A payroll tax is a wage-related tax paid by a business to the Internal Revenue Service (IRS) when distributing pay to employees.
The main difference between a payroll tax and an income tax is that an employer is responsible for paying a portion of a payroll tax or taxes, whereas an employee or individual is entirely responsible for paying an income tax or taxes.
Here’s what the IRS has to say about when payroll taxes are due.
The process, procedures, and timeline around paying payroll taxes — whether on the state or federal level — will vary by area and industry.
According to the IRS, employers are responsible for the following when it comes to payroll taxes:
Your tax responsibilities include withholding, depositing, reporting, and paying employment taxes. You must also give certain forms to your employees, they must give certain forms to you, and you must send certain forms to the IRS and SSA.
The Internal Revenue Service
Employers are responsible for the following payroll taxes*:
Social Security Tax
Medicare Tax
FUTA
Social Security and Medicare are what we know as FICA taxes.
*There may be additional state income taxes an employer is responsible for covering or contributing to. For example, in Massachusetts, employers are responsible for a MA Workforce Training Tax along with the above three taxes. Check with your local tax bureau for a full list of the taxes you, an employer, are responsible for.
Additionally, employers can anticipate encountering the following payroll taxes and payroll tax forms.**
**This is not a complete list. Please check with The Internal Revenue Service for the full, accurate list of payroll taxes and tax forms required for businesses in your area.
Form 941 - Form 941, filed quarterly by businesses, is used to report income, Social Security, and Medicare taxes withheld from employees' paychecks. This form simultaneously pays the portion of Social Security and Medicare taxes an employer is responsible for.
Form 943 – Form 943 must be filed by businesses that have paid wages to farm workers or agricultural workers whose paychecks were subject to social security, Medicare, or federal income tax withholding. This form may apply to farm-to-table restaurant concepts, restaurants that own their own farm, or restaurants that pay farmworkers directly.
Form 944 – Form 944 applies to businesses "whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less." Businesses are only required to file Form 944 once a year – rather than quarterly as with Form 941 – due to their smaller size. Examples of restaurant types Form 944 may apply to include pop-up food concepts, food stalls, or food trucks.
Form 945 – Form 945 is used to "report withheld federal income tax from non-payroll payments," including 401k, 403b, governmental 457b plans, and Military retirement. If your restaurant offers employees 401k, 403b, or employs members of the military, Form 945 may apply to you.
Form 8994 – Form 8994 is used to figure the credit for paid family and medical leave for eligible employers; this Form only applies for tax years beginning after 2017. If you are an eligible employers and an employee in your restaurant has either taken a hiatus on medical leave or as a new parent, you may need to file this form.
Form 940 - Form 940 is an unemployment tax report form, submitted annually. It discloses to the IRS the amount of your business’ unemployment tax liability as well as the amount you have paid on this liability.
Here is the most current list on IRS.gov of federal tax forms employers are responsible for. Check back regularly for updates.
Per the IRS’ instructions:
"You must deposit federal income tax withheld, and both the employer's and employee's social security and Medicare taxes. There are two deposit schedules, monthly and semi-weekly. Before the beginning of each calendar year, you must determine which of the two deposit schedules you are required to use. To determine your payment schedule, review Publication 15 for Forms 941, 944 and 945, or Publication 51 for Form 943. If you fail to make a timely deposit, you may be subject to a failure-to-deposit penalty of up to 15 percent. Deposits for FUTA Tax (Form 940) are required for the quarter within which the tax due exceeds $500. The tax must be deposited by the end of the month following the end of the quarter. You must use electronic funds transfer (EFTPS) to make all federal tax deposits. See the Employment Tax Due Dates page for information on when deposits are due."
To calculate payroll taxes in your area, you need the following information:
Your state
The employee’s gross annual pay
Your state’s State Unemployment Insurance (SUI) rate
Employers calculate withholding for federal income taxes based on the information provided by their employees on their completed W4 forms.
Here are the sources of information you need to calculate withholding for an employee:
Now that you have all the information you need to calculate withholding for your employees, you will use Publication 15-A to perform the calculations. The IRS created this guide to help employers navigate calculating withholding, as well as this calculator to help you calculate withholding.
Yes, the tips or gratuity a tipped-wage worker receives are taxable, because the IRS considers them a part of their income. Tipped wage employees are responsible for tracking and declaring their tips. For a full list of the rules, regulations, and processes around paying taxes on tips, check out the IRS’ instructions here.
Besides the financial investment in labor, restaurant owners, operators, and managers spend a lot of time calculating and distributing payroll to their employees.
The IRS reported recently that 33% of employers make regular errors when processing payroll.
Restaurant payroll can take anywhere between two and eight hours to complete, because traditionally, the crucial data needed to run payroll is collected and stored in a myriad of places: Timecards and tip accrual in one place, schedules, PTO, benefits, and overtime in another, and tax information in yet another. Because these different data wells don’t speak to one another, it’s on whoever does payroll to manually combine labor data and calculate payroll.
Learn How Toast Payroll Helped Alto Pizza Reduce The Time They Spend on Payroll by 60%.
There are a variety of options when it comes to payroll software for small businesses. Restaurant owners, operators, and managers who conduct payroll typically use payroll software, an online payroll service, or a restaurant payroll spreadsheet. The outputs of those systems are then manually uploaded into the restaurant’s chosen payroll software or online payroll service.
Popular payroll software or online payroll service vendors include:
ADP Payroll
Intuit Payroll
Quickbooks Payroll
Gusto Payroll
Patriot Software
Paychex Software
These payroll software and online payroll service vendors are not restaurant specific and may or may not integrate with your restaurant's point of sale system.
If you’ve decided to invest in a payroll software, consider Toast Payroll & Team Management, the first all-in-one restaurant point of sale and payroll solution built specifically for restaurants. Toast Payroll & Team Management saves you time and streamlines your restaurant operations through:
When it comes to doing payroll, getting down to digits and dollars typically means calculating labor costs and gross pay. Hours worked, rate of pay, and tax rates all come together as a part of the restaurant payroll process. These numbers are the place to start, because all the other calculations for tipped wages, overtime, withholding, and deductions are based on gross pay.
If you're using a payroll software system, you probably won't need to do these calculations manually. If you're still using paper or spreadsheets, though, get ready to dive in. Download our restaurant metrics excel template to help you make all these calculations.
Labor cost percentage is one of the most important restaurant payroll metrics to keep track of. In many cases, labor is the highest restaurant cost – second maybe to food costs or rent. According to Chron, labor costs average 30-35% of total revenue for the foodservice industry.
Labor cost describes the amount your restaurant spends on labor, including paycheck amounts as well as taxes and employee benefits. The amount you spend on labor also affects your prime cost – your total cost of goods sold plus total labor cost — which is how many restaurateurs examine their restaurant’s efficiency.
Restaurateurs may be surprised to learn that labor cost includes more than just hourly wages. Here are some considerations to take into your labor cost calculation:
Salaried employee wages
Hourly employee wages
Bonuses
Overtime
Payroll taxes
Health care
Sick and vacation days
Basically, anything that can be categorized as “labor-related” goes into your labor cost percentage calculation.
How to calculate labor cost percentage
There are a few ways to calculate labor cost percentage. We’ll be diving into two labor cost percentage formulas in particular: labor as a percentage of sales and labor as a percentage of total operating costs.
Labor as a percentage of sales
Labor cost percentage based on sales is the most common formula. Here’s how it works:
Determine your restaurant’s labor cost. This cost includes all the money the business had to pay to its employees throughout the year.
Determine your restaurant’s revenue. Revenue, in this case, is your bottom line: the amount of money your business takes in before any taxes or other deductions have been made. You can find this number in your POS system dashboard.
Divide your restaurant’s labor cost by its annual revenue. For example, if the restaurant paid $300,000 a year to its employees and brought in $1,000,000 a year in sales, divide $300,000 by $1,000,000 to get 0.3.
Multiply by 100. This final number is your restaurant’s labor cost percentage. In this example, it's 30%.
Use this calculator to determine your labor cost percentage based on revenue.
Labor as a percentage of total operating costs
Labor cost percentage can also be calculated relative to total operating costs. In this case, the steps are only slightly different.
Determine your restaurant’s annual labor cost. This cost includes all the money that the business had to pay to its employees throughout the year.
Determine your total operating costs. Total operating costs are the total cost of doing business; not just sales, but including costs for marketing, rent, food, drink, and any other expenses.
Divide labor cost by total operating costs. For example, if labor costs $9,000 per month and total operating cost is $15,000 per month, divide $9,000 by $15,000 to get 0.6.
Multiply by 100. This final number is your restaurant’s labor cost percentage. In this example, it’s 60% of the total cost of doing business.
Use this calculator to determine your labor cost percentage based on total operating costs.
You use gross pay calculation to determine the wages (for an hourly employee) or salary (for a salaried employee) you owe to an employee for work they completed during one pay period. Gross pay includes regular hourly or salaried pay, and it also includes any overtime paid to the employee during the pay period.
Gross pay for hourly restaurant workers
Gross pay for hourly workers is calculated by multiplying the number of hours worked in the pay period with the hourly pay rate. Overtime pay is also included in the gross pay calculation.
For example: An hourly employee at Sarah’s Restaurant is paid $10 an hour and worked 42 hours in a work week. You pay overtime at 1.5 times for any hours more than 40 per work period.
Regular pay: $10 x 40 hours = $400
Overtime pay: $10 x 1.5 x 2 hours = $30
Total gross pay for the weekly pay period = $430.00
Gross pay for salaried restaurant workers
Gross pay for salaried employees is calculated by dividing the total annual pay for that employee by the number of pay periods in a year.
For example: A salaried employee at Sarah’s Restaurant has an annual salary of $50,000 a year. The salaried employees are paid on the 1st and 15th of each month (twice a month x 12 months = 24 pay periods). Divide $50,000 by 24 to get $2,083.33, and that’s the employee’s gross pay for each pay period.
Net pay is the amount of pay (either salaried or hourly) an employee receives after withholding for federal and state income taxes and any additional paycheck deductions. Net pay is the amount of money your employees actually receive on their paychecks.
To calculate net pay, start with your employee's gross pay — the amount an employee is owed for the pay period.
Next, deduct federal income tax and withholding. Federal income taxes are withheld based on the information your employees provide on Form W-4 when they start at your restaurant. Your employee's tax bracket and filing status determine their federal income tax withholding for the pay period, and the total withholding will be taken from your employee's paycheck.
Side note: Make sure you have the most recent W-4 form for every one of your employees. Your employees can submit a new W-4 at any point, as often as they need, but only once per pay period.
Next, deduct state withholding. Now, be careful here because different states have different tax rates and rules. Reference the Bureau of Labor Statistics for information on how each state calculates state income tax withholding to figure out how much to deduct.
Next, deduct social security and medicare tax. To calculate FICA tax, multiply your employee’s gross pay by their portion of the tax, which is 7.65% (6.2 percent for Social Security and 1.45 percent for Medicare).
Finally, take any voluntary deductions from the remaining amount. This includes things like your employee’s voluntary withholding, health plan premiums, wage garnishments, and charitable donations.
After taking all these deductions from your employee’s gross page, you should now have the net pay amount to write on their paycheck.
To summarize, the formula used to calculate net pay for your employees is:
Gross Pay – Federal Income Tax & Withholding – State Income Tax & Withholding – Social Security – Medicare Tax – Any voluntary deductions = Net Pay
In restaurants, tips aren’t just income — they’re taxable income. And because of this, employees and employers each have specific calculations and reporting requirements. As a restaurant owner or operator, balancing the tip credit and minimum wage for tipped employees can get a little complex.
Firstly, how do we define a tipped employee? A tipped employee is an individual who regularly earns $30 or more per month in tips.
The main way restaurants must prove they’re following the labor laws is through the application of the server tip credit, a method that lets employers count employee tips as part of the hourly minimum wage. The IRS states that an employer must ensure that the minimum total tip income reported by employees during any pay period is equal to 8% of your restaurant’s total receipts for that period. The reporting process is done quarterly, through payroll, using Form 941.
According to the Department of Labor’s Tipped Employees Under the Fair Labor Standards Act guidelines, here are some of the things employers are responsible for when it comes to managing tipped employees:
The current minimum wage is $7.25 per hour.
Employers must inform tipped employees of the cash amount of their direct wage — the minimum required cash wage for tipped employees is $2.13 per hour.
The maximum tip credit an employer can claim is $5.12 per hour.
The tip credit claimed may not be higher than the amount of tips the employee earns.
Employers must be able to substantiate that the total wages are meeting all minimum wage requirements.
If the tip credit is not enough to meet minimum wage requirements, the employer must make up the difference.
Deductions for walkouts, breakage, or cash register shortages are illegal.
Overtime is calculated on the full minimum wage — not the cash wage payment minus the tip credit.
What about tip pooling laws? A tip pool is when there’s an arrangement between tipped employees to share tips. Servers, hosts, bar staff, and bussers in a restaurant may pool their tips. Employers can claim credit for tips the employees have received directly, as well as credit for tips distributed from a valid tip pool. The Fair Labor Standards Act does not state a minimum or maximum contribution or percentage for tip pools.
Even though tips are the sole possession of employees, restaurant employers are still responsible for accurately reporting tipped income. If a discrepancy or inaccuracy is found, the first place an auditor will look is probably your payroll.
Restaurateurs can improve their compliance and take advantage of the employer tip credit by training their employees, seeking the services of a local restaurant accountant, and making processes easier with accounting and payroll technology.
How long you're legally required to keep your restaurant's payroll records depends on how the following three statements apply to your restaurant:
If none of the above apply to you, keep your payroll records for three years.
Still have questions? Refer to this page from The Internal Revenue Service's Website.
If you've chosen to invest in a restaurant payroll software or service, it's important that your chosen provider has a baked storage feature where you can keep payroll records safely and securely for years to come. There are strict regulations around how businesses and employers aught to store customer or employee personally identifiable information – also known as PII. Please refer to this guide from The Department of Homeland Security.
So there you have it, a holistic overview of how to do payroll for restaurants.
If you have additional questions about how to do payroll for your employees, reach out to The Internal Revenue Service directly or contact an accountant in your area.