Managing the payroll can be a headache for any business. But restaurants face several unique challenges, stemming from the high number of employees relative to the size of their business, the high number of employees with hourly and variable schedules, the high number who receive some compensation through gratuities, and the highest rate of employee turnover of any industry (as high at 75% at the tail end of the pandemic). These factors all complicate the process of paying restaurant workers accurately, on time, and in compliance with laws governing taxes, wages, and hours worked.

While paying staff properly can be a significant business expense in an industry that operates on tight profit margins, getting payroll right is a business imperative. Getting this critical financial function wrong exposes restaurateurs to lawsuits and regulatory penalties, and it drives away good employees.

What Is Payroll?

The word “payroll” is often used in slightly different ways, but the functions include monitoring work hours, determining salaries, managing tax payments and withholdings, overseeing deductions and contributions to benefits, and ensuring timely and accurate payment to employees. Finance leaders talk about “putting people on the payroll” or “doing payroll” or “reporting payroll”—referring, respectively, to a list of employees, the process of paying those employees, and the total wages paid to those employees over a given fiscal period.

In that sense, payroll encompasses everything having to do with providing workers their rightful wages. And there are a lot of steps in that process.

Employees must be properly classified as salaried or hourly employees. Their hours must be recorded accurately on timesheets, and they must always be paid, by check or direct deposit, on time, with the appropriate local, state, and federal income, FICA (Social Security, Medicare), and payroll taxes withheld. Hourly employees must be paid in compliance with laws that govern the total hours a person is allowed to work and when they’re to receive overtime pay. Holiday, sick, and vacation pay, as specified in employment policies, must be properly allotted.

Key Takeaways

  • Restaurants face unique challenges managing payroll stemming from their high staffing levels, high numbers of hourly employees who work variable shifts and receive tips, and high employee turnover rates. These factors increase the chances of payment errors that create legal and personnel liabilities.
  • Among the challenges in running payroll is ensuring that the hours employees log in time-management systems, be they written timecards or time clocks, are accurately reflected in payroll calculations. Restaurants also need to carefully account for tips, whether they’re kept by employees who receive them or pooled among staff, as tips are considered taxable income and, in some states, offset minimum wage obligations.
  • Modern payroll applications can be an enormous asset to restaurants, easing the process of paying large and fluctuating staffs correctly. But these businesses should keep in mind that not all payroll software vendors offer features that are useful to restaurants, such as the ability to track tips as well as hours at different payrates for workers who do multiple jobs.

How to Run Payroll for Your Restaurant

Running payroll is a multiphase process. The preliminary phase involves onboarding employees by collecting all relevant documents and entering them into a payroll system. Then comes the recurring task of compiling hours worked for every pay cycle, calculating wages, and cutting checks. After every pay cycle, many restaurants review their payroll figures to glean insights into optimal staffing levels and the health of the business.

  1. Select restaurant payroll software

    The software a restaurant selects to run payroll will affect the speed and accuracy of the process. Restaurants should consider software vendors that offer solutions purposed to their business size and desired functionapty. The features of a payroll system will enable, or limit, the restaurant as it tracks employee hours and compensates staff, as we’ll cover more later.

  2. Onboard employees

    A restaurant can’t pay its employees until it has onboarded them onto the payroll system. This involves classifying employees as hourly or salaried; collecting relevant federal tax-related documents (Form W-4, which establishes tax withholdings, and Form I-9 to verify identity and employment authorization); and providing employees with materials that stipulate benefits, vacation, and sick leave. The business must also decide on its pay schedule; a biweekly cycle is the most common in the industry.

  3. Ingest hours

    A critical step in running payroll is precisely tabulating the time an employee worked in the pay cycle. That means transferring hours from a timesheet—either an automated system for clocking in and out or a written timecard—to the payroll system. This transfer can introduce time-tracking errors that are more likely to go unnoticed at restaurants than at other businesses, as restaurant employees often don’t receive the same wages for every pay cycle because of inconsistent hours, multiple jobs with different payrates, and varying gratuities.

    Many restaurants still manually transfer hours from timesheets into payroll systems or cut and paste from spreadsheets. But the best way to avoid time-tracking errors, which can prove costly to both the employer and employee, is to integrate time-management and payroll systems.

  4. Track tips

    A large percentage of restaurant workers—bartenders, waitstaff, delivery drivers—receive direct tips from customers that supplement their hourly wages. It’s incredibly important to report and pay out these gratuities accurately, as they’re considered taxable income that must be disclosed to government tax bureaus.

    Tracking tips can be tricky, as some are scribbled on a receipt and others come in the form of cash scooped off a dirty dinner table. And the process is further complicated at some restaurants by tip-sharing programs, whereby tips go into a pool and then are distributed evenly among tip-receiving staff as well as managers, hosts, and back staff. Another factor to consider is that some states don’t allow tip credits, through which gratuities go toward meeting employers’ minimum wage obligations.

  5. Withhold taxes

    The employer is responsible for properly classifying employees as salaried or hourly, having them submit all state and federal (W-4) tax-withholding documents, and withholding the correct amount of taxes from a paycheck, including local, state, and federal income tax, FICA (Social Security and Medicare), and the payroll taxes that both employees and employers must pay. Tax rates vary among states and by the total compensation an employee earns during a fiscal year, which establishes the employee’s tax bracket. Payroll systems that calculate and automatically deduct taxes help businesses avoid headaches with tax bureaus.

  6. Issue payments

    Some employees still prefer to pick up their checks and pay stubs at the job or have them mailed to their homes. More often these days, employees opt for direct deposit, where their net wages go directly into their bank accounts. However pay is distributed, the checks need to come in accurately and on time—incorrect or late payments can result in penalties or even lawsuits. A system that automates the creation of pay stubs and delivery of checks through the employee’s preferred method is a way to avoid costly errors.

  7. Review results

    Restaurant owners and operators closely monitor their financial results, as they operate on tight margins, have fluctuating revenues and costs, and frequently adjust their staffing levels. It’s routine to review where payroll stands in relation to gross sales after closing a pay cycle. And there are many more insights that can be gleaned about the health of the business, labor costs, and workforce efficiencies by evaluating payroll data with advanced analytics tools.

What Percentage of Sales Should Payroll Be?

Restaurants typically aim for a benchmark of 20% to 30% of their total sales going to wages and salaries. The percentage trends to the lower end of that range for full-service restaurants, in which tips account for a larger percentage of pay.

While that percentage benchmark isn’t an outlier from most other industries, it’s worth noting that restaurant wages tend to be relatively low, and restaurants usually employ more workers relative to businesses in other industries that have comparable payroll expenses. The National Restaurant Association estimates that US restaurants will employ 15.5 million people by the end of 2023—surpassing the workforce before the pandemic. Industry sales are expected to reach $997 billion this year.

Restaurant Payroll Software Benefits

Small restaurants sometimes try to get by with simple tools for doing payroll, such as handwritten ledgers or spreadsheets. But a mom-and-pop diner or corner coffee house, just like a giant restaurant chain, stands to benefit greatly from modern software that eases payroll processing and reduces the chances of costly errors. These benefits include the following:

  • Automation of Wage Calculation
  • Accurate Compensation
  • Tax Compliance
  • Timely Paycheck Issuance
  • Labor Cost Analysis
  • Self-Service Employee Portals
  • Integration with Other Systems

Payroll applications automate converting hours recorded on timecards or in time clocks into tabulated wages, eliminating a time-consuming manual process that’s prone to miscalculations. The software gives restaurant operators confidence that their employees are properly compensated, based on their salaries or pay rates, hours worked, and tips received. It also withholds all relevant local, state, and federal taxes while ensuring overtime and other wage and hour laws aren’t violated. And payroll software issues paychecks in a timely fashion to all workers, including those who just started and those who just quit—common scenarios in an industry with high employee turnover that sometimes complicate payroll disbursements.

Another important benefit is that after every pay cycle is completed, payroll applications give restaurateurs reports with precise figures that help them assess their labor costs and inform staffing decisions going forward. A recent innovation are self-service portals that employees can log into to review their paychecks and tax forms—pleasing employees while taking some of the workload off HR.

It’s important to note that payroll applications are even more beneficial to restaurateurs when integrated with HR, workforce management, training, and accounting systems.

Choose the Right Restaurant Payroll Software

Restaurants should evaluate several factors and features before investing in payroll software.

The first decision is usually whether they want to buy a license for on-premises software and any hardware needed to run it, as well as hire or contract personnel to support the system. The alternative is a recurring fee for cloud-based payroll software, typically preferable for smaller restaurants as it eliminates much of the work required to manage, upgrade, and secure their IT environments.

Once a restaurant chooses between on-premises and cloud, it needs to select a vendor whose solution fits its distinct needs and is priced to its budget. Restaurants should ask the following questions: Does the software provider have relationships with financial institutions that enable them to do direct deposits? Does the solution include an applicant tracking and onboarding system and an employee self-service portal? Can it integrate with existing point of sale systems and legacy tools the restaurant might still want to use, such as spreadsheets? Are there limits on the number of users? Does it support tax codes in the states (and countries) in which we operate? Is it capable of filing year-end tax forms with the government?

Restaurants should pay close attention to the availability of features that are usually necessities in their industry. Most will need their payroll software to have tip tracking and tip allocation capabilities to facilitate incorporating gratuities into wage calculations—and to ensure, either through alerts or auto adjustments, no violations of minimum wage laws. And because restaurants often have multi-role employees, it’s usually beneficial to use payroll software that can calculate differential wages for people alternating shifts and jobs—such as line chef, host, or server—at different pay rates.

For restaurant owners and managers particularly interested in drawing insights from business data throughout the pay cycle, it’s important to consider vendors that integrate analytics tools with their payroll applications. They also should consider whether they want to go with a vendor that offers a comprehensive suite of integrated applications, including core HR, workforce management, and training, as well as accounting.

Finally, it’s always important to consider the cost of ownership—both the capital expense of an on-premises system or the operating expense of a recurring cloud bill.

Meet Restaurant Industry Needs with NetSuite

Restaurants turn to NetSuite for payroll because of its ease of use, scalability, rich feature set, and out-of-the-box integration with a comprehensive suite of business management applications.

NetSuite’s SuitePeople Payroll is a cloud solution that automates the entire payroll process, from tabulating wages to withholding taxes to deducting benefits to issuing printed checks or direct deposits directly to bank accounts.

NetSuite sets itself apart with rigorous reporting capabilities. The software enables restaurant operators to pore over every aspect of their payroll—they can get a data-driven overview of their entire workforce spread over any number of locations or drill down into a specific employee’s compensation.

A distinct advantage of running payroll with NetSuite is the broader application suite. NetSuite SuitePeople Workforce Management is a leading solution for employee scheduling and time recording—and one click converts hours logged in that system to payroll. Then, after payroll is complete, it’s just as easy to pass that data into the NetSuite ERP accounting system.

Entrepreneurs usually open restaurants because of their love of cooking food and pleasing customers. But the business of running a restaurant, characterized by tight margins and inconsistent revenue streams, can be extremely challenging.

Payroll is a particularly demanding process, as restaurants need to hire lots of employees to market their venues, take reservations, seat customers, take and serve orders, prepare dishes, mix drinks, bus tables, and wash dishes. Most of these types of jobs are filled by employees who work variable shifts and earn tips to supplement their wages, complicating the process of accurately and legally paying them. High employee turnover, driven in part by competition for skilled restaurant workers, makes running payroll even harder.

Meantime, restaurants must avoid payroll errors, which can tempt lawsuits and problems with tax regulators, as well as competitors swooping away their best workers. Modern payroll applications that automate the process of calculating wages, deducting taxes, and issuing payments is one way of easing and safeguarding the payroll process.

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Restaurant Payroll FAQs

What needs to happen before a restaurant can run payroll?

Restaurants, like any business, must take several preliminary steps before running payroll. Among them, they need to onboard employees into the payroll system, properly classify them as hourly or salaried employees, have them fill out all relevant tax documents, and provide them materials that stipulate benefits, including policies on vacation and sick leave. Restaurants also have to decide on the pay schedule (biweekly is most common in the industry).

What are the major steps in running payroll?

To run payroll, a restaurant must transfer the hours its employees recorded in that pay cycle from a time-management system to the payroll system. It must then calculate wages based on the hourly payrate for the job done and any overtime wages, properly deduct all relevant local, state, and federal taxes, and issue payment to employees as either checks or direct deposit. After payroll is complete for that cycle, restaurants can use analytics tools to glean insights about the health of the business, labor costs, and workforce efficiencies.

How are restaurant workforces unique?

The restaurant business is a labor-intensive one, with workforces of mostly low-wage, hourly employees who sometimes work inconsistent shifts and receive a significant part of their compensation from gratuities. Restaurants also have high annual employee turnover rates—estimated at about 75% by the National Restaurant Foundation in the aftermath of the COVID-19 pandemic. All these factors complicate payroll.

How do tips impact payroll?

Tips have to be accounted for as part of employee wages, as they’re considered taxable income. Some restaurants have tip-share policies in which employees pool tips and divide them across the staff, including with untipped back staff. Some states allow tips to offset minimum wage obligations.

What percentage of restaurant revenue should go to payroll?

Restaurants typically aim for a benchmark of 20% to 30% of their total sales going to payroll. The percentage trends to the lower end of that range at full-service restaurants in which tips account for a greater share of wages.

What problems can payroll errors cause for restaurants?

There are many ways to make mistakes when doing payroll, including recording hours incorrectly, failing to factor in overtime pay, issuing late payments or late final checks, not accurately accounting for tips, or not properly deducting taxes. These errors risk exposing restaurants to lawsuits from their employees and audits and penalties from tax agencies. Such errors also alienate their best workers.

What are the benefits of payroll software?

Payroll software automates converting hours recorded by timecards or time clocks into tabulated wages, eliminating a time-consuming manual process that’s prone to miscalculations. Payroll software calculates pay for the cycle, withholds all relevant local, state and federal taxes, ensures overtime and other wage and hour laws are not violated, and issues paychecks to all workers, including those who just started and those who just quit—common scenarios in an industry with high employee turnover. Some payroll applications include self-service portals and data-driven reporting.