We’re willing to bet you got into the restaurant industry because you’re passionate about food and hospitality. However, to stay in business long enough to serve the food you love, you also have to master the operational side of running a restaurant. Managing payroll is a critical component of any restaurant’s operations.
After all, your employees are the core of your business. If you don’t pay them, they’ll stop showing up to work, and you won’t have anybody to serve up the hospitality your customers expect.
We’ll help you make sure it never comes to that by teaching you the ins and outs of doing payroll for your restaurant. You’ll learn:
- What payroll is
- How to do payroll processing on your own
- Important payroll forms and documents to collect
- When to use a payroll service
- When to use payroll software
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What is payroll?
A payroll is a document that lists a business’s employees and how much they’re owed in wages for a particular pay period. “Doing payroll,” “running payroll, or “processing payroll,” therefore, involves calculating wages, paying employees, filing taxes withheld from paychecks on behalf of employees, and several other steps.
The three most popular options for doing payroll for a restaurant are:
- Processing payroll on your own, manually
- Outsourcing to a payroll service
- Using payroll software
We’ll explain what each of these processes entails to help you decide how to pay employees at your restaurant.
How to do payroll on your own
Running payroll requires a lot more than just calculating an employee’s hourly wage and multiplying it by how many hours they’ve worked during that pay period. Payroll processing involves calculating wages, withholding taxes, paying into benefits, complying with restaurant labor laws, and maintaining your payroll records.
Here’s a step-by-step look at managing payroll manually:
1. Collect payroll forms
Collect payroll documents to determine tax withholding. Because this step is critical to compliance, we’ve dedicated the next section of this guide to reviewing exactly which documents you need to collect.
2. Set a payroll schedule
Decide how often you’ll pay your team, and let them know when to expect their paychecks. Most restaurants pay their staff every week or every other week.
3. Calculate gross wages
Figure out how much you owe your team before taxes are withheld from their paychecks.
To calculate the gross wages of an hourly worker, multiply the team member’s hourly pay by the number of hours they worked during the pay period in question. For example, a busser who works 24 hours at a rate of $9 per hour will have a gross pay of $216 for the pay period.
Calculating wages for tipped workers, like servers and bartenders, is a bit more complicated. First, multiply the team member’s hourly rate by the number of hours they worked in the pay period. Then, distribute tips according to your tip out structure. If a tipped worker’s pay is less than the untipped minimum wage after tip distribution, you, the employer, are responsible for subsidizing wages so that they reach your state’s or province’s untipped minimum wage.
For example, let’s say a server in Texas has a tipped hourly wage of $2.13. They work 10 hours during the pay period in question, for a base pay of $21.30. They earn an extra $40 in tips, bringing their gross wages to $61.30. But because the state’s minimum wage is $7.25 per hour, the server can’t be paid less than $72.50 for working 10 hours. That means the restaurant would have to add $11.20 to the server’s wages to make up the difference between the tipped wage and the state minimum wage. A salary calculator for tipped wages can help you figure out how much you owe to make up the difference.
To calculate gross wages for salaried positions, simply divide the employee’s annual salary by the number of pay periods in a year. For example, a restaurant manager who earns $60,000 annually at a restaurant that pays its staff weekly (52 pay periods) will earn about $1,154 every pay period.
4. Calculate payroll tax withholding
You’re responsible for withholding a number of payroll taxes on behalf of your employees, including:
- Federal payroll taxes: In the U.S., payroll taxes are also known as “FICA” (for Federal Insurance Contributions Act) and include Social Security and Medicare taxes. In Canada, federal payroll taxes include the EI and CPP.
- State and provincial payroll taxes: Your state or province will also have a tax rate.
- Local taxes: Some cities and municipalities will also collect payroll taxes.
A salary calculator can help you figure out how much to withhold in payroll taxes.
Skip this step for team members who are independent contractors, since they’re responsible for making their own tax payments.
5. Calculate deductions
If you offer your employees benefits, you’ll need to deduct some of their earnings to pay into the benefits they’ve elected. Refer to the payroll forms you collected in step one to figure out how much they want deducted.
For example, an employee may want $300 of each paycheck put into their employer-sponsored retirement fund, $250 put towards their health insurance premium, and $25 put into their flexible spending account. You would deduct a total of $575 from that employee’s paycheck.
6. Pay your staff
On pay day, you’ll pay your employees their gross wages minus any tax withholding and deductions. Popular payment options include check, direct deposit, and cash.
7. File payroll taxes
As the employer, you’re responsible for withholding employees’ payroll taxes and then filing them with the government. Visit the websites of your federal, state or provincial, and local revenue departments for the latest instructions on how to pay taxes. Most will have online filing options.
8. Pay employee benefits
Pay into the benefits that your employees elected. Direct their deductions towards health insurance premiums, retirement funds, and so on. Most providers have online payment options.
9. Maintain payroll records
Whether your restaurant is located in Canada or the U.S., you’ll need to hold on to your payroll records for three years in case of an audit. A digital filing system is preferable to paper records, as the latter can easily be lost or destroyed.
Note: The steps above are just a general overview of managing payroll. Payroll processing requirements can vary greatly across municipalities, so please consult a payroll professional for guidance on how to pay employees in your area.
Important payroll forms and documents
To be able to pay your team members properly, you’ll need to collect the following information from them:
- Employee contact information including legal name, phone number or email, address, and emergency contact details.
- Tax forms that contain taxpayer identification and withholding details:
- Payment instructions such as a mailing address for check payments or bank account information (routing and account numbers) for direct deposit.
- Benefits enrollment and election forms for perks like employer-sponsored retirement savings accounts, health insurance, and commuter benefits.
When to use a payroll service
As you can see, managing payroll on your own is a lengthy, confusing process. It’s easy to make mistakes if you’re not a payroll professional, which can get your restaurant into trouble and create headaches for your employees.
An alternative to doing your own payroll is outsourcing the process to a payroll service. You might consider hiring a payroll service if you:
- Don’t have the expertise to do your own payroll.
- Don’t have the time to do your own payroll.
- Want to be hands off with payroll.
- Want to ensure compliance with restaurant labor laws.
- Want to ensure staff members get paid on time.
- Have someone on staff who can manage relations with the payroll service.
- Can afford to outsource payroll processing. Hiring a payroll service costs between $150 and $200 per employee each year, or between $12.50 and $17 per employee per month. Running payroll for a team of 10 through a payroll service would therefore cost between $1,500 and $2,000 each year.
If you want to work with a payroll service but don’t know how to find one, we recommend asking other restaurateurs for recommendations. Find a service that has good reviews, works for your budget, has expertise on local payroll tax laws, and is easily accessible.
When to use payroll software
If you know you can’t handle payroll processing completely on your own, but don’t want to outsource it completely, using restaurant payroll software is a good middle ground.
Payroll software could be a good option if you:
- Have time to manage payroll processing.
- Want to learn how to do payroll but aren’t a payroll expert.
- Want to ensure compliance with restaurant labor laws.
- Want to ensure staff members get paid on time.
- Want a cost effective option. Though pricing can vary greatly, payroll software tends to cost less than outsourcing to a payroll service. For example, one payroll software charges a base rate of $39 per month, plus $6 per employee per month. For a team of 10 employees, annual payroll costs would amount to $1,188 — which is less than the $1,500-$2,000 you’d spend on a payroll service.
- Use a restaurant POS system that integrates with payroll software. When your payroll software can access sales data, it can help you manage labor costs in real time, avoid overspending on labor, and make sure you’re never understaffed.
So what can you expect when you use payroll software? Software can automate most processes involved, from collecting tax forms and paying employees on pay day, to filing taxes and managing your records. Plus, payroll software provides visibility through a user-friendly interface.
We recommend using payroll software that integrates with your POS. Check out Lightspeed’s restaurant payroll integrations to find out more.
Checklist: How to do payroll for your restaurant
Now that you understand the ins and outs of restaurant payroll processing, here’s a cheat sheet you can refer to time and again if doing your own payroll. Print it out and hang it in your back office or take a screenshot to keep it within reach:
- Collect payroll forms:
- Employee contact information
- Tax forms: W-4 or W-9 for U.S. staff or TD1 for Canadian staff
- Payment instructions
- Benefits enrollment and election
- Set a payroll schedule
- Calculate gross wages
- Calculate tax withholding
- Calculate deductions
- Pay your staff
- File payroll taxes
- Pay into benefits
- Maintain payroll records
If doing your own payroll sounds like a headache, consider outsourcing to a payroll service or using payroll software that integrates with your restaurant POS system. Need help with your payroll software integration? Talk to us today.