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Introduction
What is Payroll?
Restaurant industry sales are projected to hit a whopping $1.6 trillion in 2025. And a significant portion of those projected sales, an estimated $450 billion, will go towards restaurant payroll and compensating workers. But managing payroll in the restaurant industry comes with unique challenges. High turnover rates (nearly 80% annually) and short employee tenure (just 110 days on average) are common, along with complicated tax and labor cost considerations. As a restaurant operator, it’s important to understand these complexities and know how to navigate them effectively.
Luckily, restaurant payroll is like any other process; it becomes much easier to understand when you break it down step-by-step.
Let’s take a deep dive into everything you need to know about restaurant payroll, including the payroll paperwork you’ll need for each employee, the different options for processing payroll (and how to choose the best option for your restaurant), and a breakdown of restaurant payroll taxes. We’ll also cover how to choose the right payroll platform for your restaurant, special considerations for tipped employees, and the formulas you’ll need to calculate gross pay, net pay, and labor costs.
Note: This guide is for educational purposes only and does not constitute legal advice. Restaurant owners and managers should consult with legal counsel and/or a qualified payroll professional for specific advice and support.
What is restaurant payroll and why it matters
First things first. Before we go too deep into the topic, let’s quickly touch on what, exactly, restaurant payroll isand why this restaurant payroll definition matters to your restaurant.
Let’s start with some payroll basics. Payroll is the process by which employers pay their employees. This includes everything from calculating wages and gross pay, withholding federal and state taxes, managing deductions (for example, wage garnishments or benefits like health insurance), and distributing net pay to each employee.
Given that definition, restaurant payroll (or food service payroll) is the process by which restaurants pay their employees. And while all the aforementioned steps will need to be completed to run payroll for your restaurant, some additional steps and considerations can make restaurant payroll more challenging than other industries, including:
Diverse workforce. From servers to bartenders, chefs to dishwashers, hosts to managers, restaurants often employ a diverse set of hourly, tipped, and salaried employees (as well as part and full-time)—each of which has distinct payroll requirements and tax implications.
High turnover. Setting up payroll for each employee takes a solid amount of time, energy, and paperwork. But, as mentioned, the restaurant industry has an extremely high turnover rate and short employee tenure, which means restaurant managers and owners are continually having to put in the time and work to not only hire new employees, but get them properly set up for payroll.
Tipped employees. While navigating payroll can be a complex process for any employee, it can be especially complex for tipped employees, who have special wage and tax considerations (more on those a bit later). And because so many restaurant staffers are eligible for tips, the overall payroll process can feel more complex.
Understanding the definition of restaurant payroll is one part of the equation. But the other is understanding why it matters.
Making sure your restaurant payroll is accurate is a must. Why? Inaccuracies in your payroll processes can cause serious issues and consequences for your restaurant. For example, if you’re miscalculating your employees’ wages, you could find yourself on the hook for back wages. Or, if your restaurant consistently makes mistakes when distributing employee pay, it could make it harder to attract and retain top industry talent, both of which can negatively impact restaurant labor costs (which, ideally, will fall between 28 percent and 33 percent of your total revenue).
Clearly, mastering restaurant payroll is important, both for your restaurant and your employees. But what does that actually look like?
Step One
Complete the Legally Required Payroll Paperwork
Essential payroll paperwork and legal setup
Before you start processing restaurant payroll and paying your team, there are a few legal steps you’ll need to take as a business, as well as payroll paperwork you’ll need to gather for every employee.
Here’s a checklist that outlines the paperwork and legal-related steps for setting up restaurant payroll:
Restaurant Payroll Setup Checklist
- Obtain an Employer Identification Number (EIN)
- If you don’t already have it, submit your EIN application via the Internal Revenue Service’s (IRS) website. This federal tax ID is required for almost all businesses with employees.
- Complete New Hire Forms
- Form W-4 (Employee's Withholding Certificate): Have each new employee complete this form to determine federal income tax withholding.
- Form I-9 (Employment Eligibility Verification): Both the employee and employer must complete this form, which verifies the employee’s identity and work authorization in the U.S.
- State Tax Withholding Forms: In addition to federal W-4 forms, some states have their own withholding forms. Check with your state's tax department to see if there are any additional state withholding forms you’ll need for your employees.
- Direct Deposit Authorization: If you’re planning to offer direct deposit AND the employee wants to opt into this payment method, collect their bank information and authorization to set up the deposit.
- Register with State Agencies
- Register with your state's Department of Labor for unemployment insurance (SUTA).
- Register with your state’s tax department for state income tax withholding.
- Secure Workers' Compensation Insurance
- Obtain workers' compensation insurance, which is required in most states to cover employees for job-related injuries or illnesses.
- Create and Distribute a Restaurant Employee Handbook
- Draft an employee handbook that outlines company policies, compensation details, benefits, and expectations, including payroll details. This is crucial for legal protection and clear communication with your team and can help avoid any payroll-related misunderstandings.
- Distribute the employee handbook to all new employees.
Getting the right restaurant business setup and ensuring you have all the necessary restaurant payroll paperwork on file for your employees is a critical part of restaurant compliance. The paperwork piece also plays a major role in scaling; making this new hire paperwork a foundational piece of your new employee onboarding takes the guesswork out of compliance, putting you in a position to more effectively grow and scale your business—which, considering 200,000 new jobs are projected to be added to the restaurant industry in 2025, is a real possibility.
Note: While this checklist can be a great jumping off point, legal and paperwork-related payroll requirements may vary by location. If you’re unsure of the required restaurant payroll paperwork and/or legal setup in your area, consider seeking professional help from a local accounting or payroll professional. These professionals can offer more specific guidance on how to set up your payroll and ensure compliance across all your restaurant payroll processes.
Step Two
How to Create a Payment Schedule for Your Restaurant
Once you’ve taken care of the legal setup and paperwork, the next step in the restaurant payroll process is actually creating your restaurant payment schedule, including how and how often you’re going to pay your employees.
Common pay schedules—and the pros and cons for restaurants
One of the first payroll-related decisions you’ll need to make as a restaurant operator is how often you’re going to pay your employees.
There are multiple pay schedules to consider, each of which offers potential benefits or drawbacks for restaurants. Some of the most common pay schedules include:
Weekly pay schedule: 52 pay periods/year
Pros: A weekly pay offers consistent cash flow and is often the preferred payment schedule for employees, which can help increase employee satisfaction and reduce turnover. This pay schedule can also be ideal when turnover does happen, as it allows administrators to quickly process the employee’s final payment and remove them from payroll prior to the next pay period.
Cons: Processing payroll creates work for administrators, and the more frequently you process payroll, the more of the work you’ll have to navigate. Given that a weekly pay schedule has the most pay periods per year, this pay schedule can create a higher administrative burden for employers.
Bi-Weekly pay schedule: 26 pay periods/year
Pros: A bi-weekly pay schedule can be a happy medium for employees and employers; employees get access to a fairly regular paycheck while employers don’t have to take on the burden of processing payroll every week.
Cons: Because months vary in length, with a bi-weekly pay schedule, there are a few months that will have three pay periods within the month, and both employers and employees will need to plan accordingly.
Semi-Monthly Pay Schedule: 24 Pay Periods/Year
Pros: A semi-monthly pay schedule has fixed pay dates (for example, the 15th and last day of the month), which employees may find helpful for budgeting purposes.
Cons: Pay periods in a semi-monthly pay schedule will vary in length, which can make wage and tax calculations more complicated for administrators and lead to uneven paychecks for workers.
Monthly pay schedule: 12 pay periods/year
Pros: A monthly pay schedule offers the lowest administrative burden to employers.
Cons: While a monthly pay schedule means less frequent payroll process for the employer, it also means less frequent paychecks for the employee, and any employees, in particular hourly or lower-wage staff, may struggle with this payment schedule. Plus, some states don’t allow monthly pay schedules.
How to pay your employees: Direct deposit
Once you’ve settled on a payment schedule, the next item to check off your payroll to-do list is figuring out how you’re going to pay your employees.
While traditional paper checks are, of course, still an option, as a restaurant operator, offering direct deposit to employees can offer a variety of benefits, including:
Increased employee satisfaction. Many employees enjoy the convenience of getting paid via direct deposit, as it gives them immediate access to funds without having to deposit a check or wait for a check to clear. And anytime you can increase employee satisfaction, it has a positive impact on turnover and tenure, which, again, are major issues in the restaurant industry.
Reduced administrative burden. Creating, printing, and distributing paper checks takes time, energy, and money. Moving to direct deposit reduces both the administrative burden, helping your restaurant save both budget and labor hours.
No risk of loss. Paper checks can easily be lost, which is a huge hassle both for you and your employee. But because direct deposit is automatic and goes directly into the employee’s bank account, there’s no way the funds can get lost in transit.
Setting up direct deposit requires some work upfront, but that work pays off in the long run by optimizing your payroll processes and saving you time and energy each pay period. If you don’t already offer direct deposit to your employees, here are the steps to take to set up this convenient payment option:
Choose a payroll provider that offers direct deposit.
Connect your restaurant’s bank account securely with the payroll system.
Collect employees' bank account numbers and routing numbers, along with signed direct deposit authorization forms.
Input the information into your payroll system OR have your employee enter their information. (Many systems allow employees to set up and manage their direct deposit information via self-service portals.)
Verify accurate setup with a test transaction (when applicable).
Impact of predictive scheduling laws
Another set of regulations to keep in mind when choosing a payment schedule is predictive scheduling laws (also known as fair workweek laws). A growing number of cities and states have enacted what are known as predictive scheduling laws (or fair workweek laws), which require employers to provide their employees’ work schedules a certain number of days in advance (for example, 7 or 14 days prior to the workweek).
Depending on the area, predictive scheduling laws may also have additional requirements for employers, like giving employees a certain amount of time off between shifts (known as “right to rest”) or offering payment if the employee’s shift is changed or cancelled outside of an approved timeframe (known as “predictability pay” or “change pay”).
While predictive scheduling laws don’t directly dictate how, when, or how often you have to pay employees, they can definitely have an impact on payroll. For example, if your restaurant is subject to predictive scheduling laws and you cancel multiple employee shifts at the last minute, you may be on the hook for predictability pay—and you’ll need to account for those additional wage premiums when processing payroll for the pay period when the shift was scheduled and cancelled (whether that pay period is a week, a month, or something in between) and include them in your employee’s payment or else face major penalties.
If you live in a city or state with predictive scheduling laws, it’s important to stay informed about the current laws in your jurisdiction, and keep in mind that labor laws often change, so make sure to stay up-to-date on any new and/or changing requirements. If you have questions about how predictive scheduling laws may impact your payment schedule or payroll operations, consider contacting a payroll or accounting professional with experience in your jurisdiction for their insights.
Step Three
Understanding restaurant payroll taxes
Tax laws (and staying compliant with tax laws) are amongst the most non-negotiable laws impacting restaurants—and in order to ensure compliance with relevant tax laws, it’s important to understand the ins and outs of restaurant payroll taxes.
As a restaurant operator and employer, you’re responsible for withholding and paying federal and state taxes (and sometimes local taxes) on restaurant employee wages. These taxes fund critical government programs, like Social Security, Medicaid, and unemployment services, and given the massive payroll restaurants process each year (projected at $450 billion in 2025), it’s clear that restaurant payroll taxes play a major part in supporting these programs.
Keep in mind that, while the cost of the tax will, depending on the situation, fall either to the employer (you, as the restaurant operator, are responsible for the cost) or the employee (the tax is withheld from the employee’s wages), as an employer, you’re responsible for withholding and remitting all of those taxes to the government.
Let’s take a look at the restaurant payroll taxes you’ll need to withhold and pay each pay period:
*Restaurants with tipped employees may be able to claim a FICA tax credit, which can reduce your overall taxable income. For more information, visit the IRS’ website.
**There are special payroll considerations (including wage and tax considerations) for tipped employees. Employers may also be able to claim a tax credit for certain tipped employees. For more information, see the next section, “Special Considerations for Tipped Employees.”
In addition to the taxes themselves, employers must also complete and submit certain forms reporting wages and taxes to the IRS and other agencies throughout the year. Here are some of the most important federal payroll tax forms you’ll need to manage as a restaurant operator, as well as when you’ll need to submit each form:
Note: While this section provides general information about payroll taxes, it is not financial or legal advice. For more insight into your personal payroll obligations and to ensure compliance with all relevant tax laws, make sure to consult with a tax professional.
Special Considerations for Tipped Employees
As mentioned, there are some special considerations for calculating wages, overtime, and withholdings for tipped employees, which, under the Fair Labor Standards Act (FLSA), are defined as any employees who customarily and regularly receive more than $30 a month in tips. And because virtually every restaurant has tipped employees on staff, it’s important to understand what, exactly, those special considerations are and how they play into your restaurant payroll.
Some things to keep in mind when you’re managing restaurant payroll for tipped employees include:
Minimum wage requirements and tip credits
Under the FLSA, as a restaurant operator, you are required to pay tipped employees a minimum of $2.13 per hour in direct cash wages. But, as it’s lower than minimum wage requirements, the direct cash wage rate is not the tipped employee’s regular rate of pay, which you’ll need to know when calculating wages and overtime. As an employer, you can take a “tip credit” to essentially bridge the gap between that direct cash pay rate and federal minimum wage requirements (or state minimum wage requirements, whichever is higher), which, in effect, "credits" them towards your employee’s wages.
So, if you pay your employee $2.13 per hour, you would take the maximum tip credit of $5.12 per hour, making their regular rate of pay $7.25, equivalent to the federal minimum wage.
As an employer, there are a few important things you need to know about tip credits, including:
It can’t be more than the actual amount of tips received
It can’t exceed the difference between the applicable minimum wage rate and the direct cash wage rate (even if the employee earned more than that amount in tips)
The tip credit for regular and overtime hours must be the same
If the employee doesn’t make enough in tips to meet the hourly minimum wage requirement, as the employer, you’ll need to make up the difference
Calculating wages and overtime for tipped workers
When calculating wages and overtime for tipped workers, it's important to remember that you don’t use their direct cash wage rate (which can be as low as $2.13 per hour). Instead, you use the rate of pay after factoring in the tip credit, typically the federal minimum wage of $7.25 per hour, or your state’s minimum wage if it’s higher.
Let’s look at an example. Maria is another server at Sarah’s restaurant. Sarah, the owner, pays Maria the direct cash wage of $2.13 per hour and takes the maximum tip credit of $5.12 per hour to meet the $7.25 per hour federal minimum wage requirement. Last week, Maria worked 55 hours, entitling her to 15 hours of overtime pay, and reported $800 in tips.
Here’s how Maria’s wages would play out for the week:
Regular rate of pay: $7.25 ($2.13 direct cash wage + $5.12 tip credit)
Overtime rate: $7.25 (regular rate of pay) x 1.5 = $10.875
Regular pay: 40 hours x $7.25 = $290
Overtime pay: 15 hours x $10.875 = $163.13
Total weekly pay: $290 + $163.13 = $453.13
While these numbers reflect the total pay for Maria, they do not reflect how much Sarah, as the employer, is responsible for paying in direct cash wages, nor do they take into account all of Maria’s tip income. Here’s a more detailed breakdown of what those numbers would look like:
Direct cash wages for regular hours: $2.13 (direct cash wage) x 40 = $85.20
Direct cash wage for overtime hours: $10.875 (overtime rate) - $5.12 (tip credit) = $5.755 per hour
Direct cash wages for overtime hours: $5.755 (direct cash wage for OT) x 15 = $86.33
Tip credit for regular hours: $5.12 (tip credit) x 40 = $204.80
Tip credit for overtime hours: $5.12 (tip credit) x 15 = $76.80
Employer-paid cash wages: $85.20 (regular) + $86.33 (overtime) = $171.53
Gross pay: $171.53 (employer-paid cash wages) + $800 (tips) = $971.53
So, Maria’s gross pay for the week would be $971.53—$171.53, of which Sarah pays in direct cash wages.
It’s also important to highlight that, with $800 dollars in tips, Maria made an average of $16.68 per hour ($800 total tips / 55 hours worked = $14.55 + $2.13 cash wages per hour = $16.68), which meets the federal minimum wage requirements. If Maria hadn’t made enough in tips to average the $7.25 minimum per hour, as the employer, Sarah would be responsible for paying the difference.
Tip pooling and sharing regulations
Pooling (or sharing) tips is a common practice in restaurants. But if you employ this practice in your establishment, it’s important to note that only tipped employees (for example, servers and bartenders) are eligible for tip pooling/sharing; employers, managers, and/or supervisors are prohibited from keeping any portion of employee tips.
Service charges vs. tips
Many restaurants tack on a service charge to customer bills when they meet certain criteria (for example, a 25 percent service charge for parties of 8 or more). But it’s important to note that, in the eyes of the IRS, a service charge is not the same thing as a tip—even if the cash ultimately ends up going to the server or tipped employee.
Under the FLSA, service charges are considered revenue for your restaurant, not tips. If you distribute these service charges to your tipped employees, they can be used to satisfy minimum wage requirements, but they then also have to be included as compensation when calculating the employees’ regular rate of pay.
Dual jobs rule (and how it impacts tip credits)
It’s a similarly common practice in restaurants to employ workers that manage a variety of tasks—including tasks that generate tip income (like serving tables) and tasks that don’t (like cleaning tasks).
If you have employees who manage both tipped and non-tipped tasks, it’s important to understand the “Dual Jobs Rule,” which prohibits employers from taking a tip credit on non-tipped time under certain circumstances, including:
If a tipped employee performs duties that are not tip-producing and are not "related to" their tipped occupation, OR
If they spend a "substantial amount of time" (more than 20% of their workweek or a continuous period of 30 minutes) on non-tipped, related duties.
In these scenarios, you’re responsible for paying the employee full minimum wage for any non-tipped hours.
Step Four
How to Choose a Restaurant Payroll System
Choosing the right restaurant payroll system
Clearly, restaurant payroll has a lot of moving parts; there’s accurately calculating employee wages (including tips), withholding and paying taxes, processing and distributing payments, calculating total labor costs and labor percentage…the list goes on. And trying to manage all of these moving parts manually can be a recipe for disaster (pun intended!); not only does manual payroll management require a huge amount of time, energy, and labor, but there’s also a high risk of errors—errors that could result in non-compliance and serious consequences for your restaurant.
Luckily, you don’t have to (nor should you!) manage payroll on your own; there are payroll systems designed specifically for restaurants that offer automated payroll solutions, allowing you to effectively and accurately manage every step of the payroll process with less work and less risk of error.
The right restaurant payroll software can solve a variety of payroll-related issues in your restaurant—and offer serious benefits in the process!—including:
Employee onboarding. As mentioned, in order to legally run payroll, there are certain forms you’ll need to collect from every new employee. Restaurant payroll systems often come equipped with automated onboarding functionality, allowing employees to fill out required payroll paperwork directly on the platform. That paperwork is then organized in the employee’s payroll file and stored accordingly, with no having to manually print, distribute, collect, or file forms on your end.
Time tracking and overtime. Many restaurant payroll systems integrate directly with your POS. This POS integration allows you to more effectively collect time tracking data (including clock-in and out times, total hours worked, and breaks), integrate it directly with your payroll processes, and automatically calculate wages due (including overtime pay!) to each employee based on relevant federal and state regulations.
Tip reporting and management. Accurately withholding taxes from tipped employees can be a complex process, especially when you’re trying to determine withholdings on your own. But automated systems offer a variety of features for more effectively managing tipped employees’ wages and withholdings, including tip collection, distribution, and accurate tax reporting for tipped wages, significantly reducing the risk of manual errors and/or compliance issues.
Tax compliance and filing. One of the most important processes restaurant payroll systems automate is tax withholding and filing. Payroll platforms automate tax calculations, initiate tax withholdings, and ensure your restaurant files all federal, state, and local payroll taxes on time, helping you stay compliant and avoid harsh penalties.
Access to data. As your restaurant payroll system manages all of your payroll processes (including time tracking, wage and overtime calculations, and tax withholdings and payments), it’s collecting a lot of data—data that you, as a restaurant operator, can use to streamline and optimize your processes and lower data costs. (For example, if, after reviewing your payroll data, you realize you’re spending a significant amount on overtime each pay period, you might adjust your schedule to distribute hours more evenly across employees.)
Clearly, the right restaurant payroll system can have a major impact on your payroll processes, making payroll easier, less time-consuming, and more accurate. But not all payroll systems are created equal, and if you want to maximize the benefits, you need to choose the right payroll system for your restaurant.
But what, exactly, does that entail? While the “right” solution may vary based on your needs, generally speaking, things you should evaluate and consider when choosing a restaurant payroll system include:
Restaurant-specific features. While there are many automated payroll platforms on the market, not all are designed specifically for restaurants. Before you commit to a payroll platform, make sure it offers restaurant-specific features, like automated calculations for tipped employee wages and overtime, or restaurant staff management features.
POS integration. For the best results, you want a payroll system that integrates directly with your POS; that way, the system automatically collects accurate time tracking data from your POS and uses that data to accurately process payroll.
Compliance updates. Compliance, particularly when it comes to tax withholding and payment, is crucial for your restaurant. As such, you want to look for a payroll system that prioritizes compliance, including automatically updating the platform (and the processes and calculations within the platform) whenever new and relevant tax laws and/or labor regulations pass.
Ease of use. Payroll is complex, but your payroll system shouldn’t be. The more complicated and confusing the payroll platform, the harder it will be for you and your staff to learn, and the less likely you/they will be to use it. Instead, look for a system that’s intuitive, easy to use, and offers robust training materials.
Customer support. In the event that you have an issue with your restaurant payroll system (or even if you just have a question!), you want to make sure you can address that issue or question with a real-live person, which is why choosing a platform with a quality customer support program is a must.
Reporting and analytics. As mentioned, payroll systems collect a lot of data that could be useful to your restaurant. But in order to make use of it, you need to not only be able to access said data, but also access it in a way that’s easy to understand and connect back to your business priorities. That’s why, when choosing a restaurant payroll system, it’s important to look for a platform with reporting and analytics features. These features will allow you to both access and understand your restaurant’s unique data points—and use those data points to improve operations and/or lower costs.
Scalability. A payroll system that’s ideal for 10 employees in a single location. may not be the right fit for a restaurant with 100 (or 1000!) employees across multiple locations. If you have plans to grow your restaurant, make sure to choose a payroll system that can easily grow with you as you add employees and/or locations.
Step Five
How to Calculate Gross Pay, Net Pay, and Labor Costs
Calculating gross pay, net pay, and labor costs
Obviously, compensation plays a major role in restaurant payroll. But not all compensation is created equal; there are different ways to calculate employee compensation and labor costs, and in order to effectively and accurately process payroll, you need to understand the formulas and calculations for each.
Let’s take a look at three key compensation categories you’ll need to know for your restaurant payroll operations (and how to calculate them!): gross pay, net pay, and labor costs:
Calculating Gross Pay
Gross pay is the total amount an employee earns before any taxes or deductions are withheld. Gross pay includes any and all types of compensation for their work, including regular wages, overtime calculation, tips, bonuses, and any other type of compensation.
The formulas for calculating gross pay each pay period are as follows:
For hourly employees: Gross pay = (Regular hours x regular rate of pay) + (overtime hours x overtime rate) + any additional compensation (if applicable)
For hourly tipped employees: Gross pay = (Regular hours x regular rate of pay) + (overtime hours x overtime rate) + tips + any additional compensation (if applicable)
For salaried employees: Gross pay = (Annual salary / number of pay periods per year) + any additional compensation (if applicable)
Let’s take a look at a few examples of how calculating gross pay might look in a restaurant:
Gross Pay Example 1: Christian, Server at Sarah’s Restaurant, Hourly and Tipped
Christian is a server at Sarah’s Restaurant who gets paid on a weekly basis. This week, Christian worked 40 hours. As a tipped employee, Christian’s direct wage is $2.13 per hour, and he made $750 in direct tips from customers (which is enough to push him well past the FLSA minimum wage threshold). Christian did not receive any other type of compensation this pay period.
Here’s how to calculate Christian’s gross pay for the week:
Gross pay: (40 hours x $2.13) + $750 = $835.20
Gross Pay Example 2: Monica, Line Cook at Sarah’s Restaurant, Hourly
Monica is a line cook at Sarah’s Restaurant who gets paid on a weekly basis at $18 per hour. This week, Monica worked 45 hours, and as a non-exempt employee, under current overtime laws, she is entitled to an overtime rate of 1.5 times her regular rate of pay for any hours worked above 40 in the weekly pay period. Monica also received a one-time bonus of $150 for winning a restaurant-wide recipe development contest.
Calculating Monica’s gross pay for the week would look like this:
Regular rate of pay: $18
Overtime rate: $18 x 1.5 = $27
Gross pay: ($18 x 40 = $720) + ($27 x 5 = $135) + $150 bonus = $1005
Calculating Net Pay
As mentioned, gross pay is the employee’s total compensation without any withholdings. But the employee doesn’t walk away with their gross pay. When they get their paycheck or direct deposit, it will reflect their net pay (also known as “take-home pay”), which is the employee’s total compensation minus all relevant deductions. Some deductions are mandatory for all employees, like federal income tax, state or local income tax (when applicable), and employee-paid FICA taxes, while others will vary by employee and restaurant (like health insurance premiums, retirement contributions, or wage garnishments).
The formula for calculating net pay for each pay period reads as follows:
Net pay = Gross Pay - (Federal Income Tax + State Income Tax + FICA Taxes + Local Taxes + Other Deductions)
Let’s look at some examples of calculating net pay for restaurant employees, using the gross pay examples outlined above:
Net Pay Example 1: Christian, Server at Sarah’s Restaurant, Hourly and Tipped
As mentioned above, Christian’s gross pay for the weekly pay period was $835.20. Based on his filing status, Christian falls under the 12 percent federal income tax (FIT) bracket. He lives and works at Sarah’s Restaurant located in Washington State, which doesn’t have local or state personal income tax. Like all employees, he is also subject to 6.2 percent FICA taxes. Christian doesn’t have any additional deductions from his wages.
Christian’s net pay for the week would be:
Federal income tax: $835.20 x .12 = $100.22
FICA taxes: $835.20 x .062 = $51.78
Net pay = $835.20 (gross pay) - $100.22 (FIT) - $51.78 (FICA taxes) = $683.20
Net Pay Example 2: Monica, Line Cook at Sarah’s Restaurant, Hourly
Monica’s gross pay for the pay period was $1005. Based on her filing status, Monica also falls under the 12 percent federal income tax bracket. Monica lives and works at Sarah’s Restaurant located in Oregon, where she is taxed at a rate of 8.75 percent for state income tax (SIT). Like all employees, she is subject to 6.2 percent FICA taxes. Monica gets health insurance through the restaurant, and as such, her health insurance premiums (which run $150 per weekly pay period) are also deducted from each paycheck.
Monica’s net pay would be calculated as follows:
Federal income tax: $1005 x .12 = $120.60
State income tax: $1005 x .0875 = $87.94
FICA taxes: $1005 x .062 = $62.30
Net pay: $1005 (gross pay) - $120.60 (FIT) - $87.94 (OR SIT) - $62.30 (FICA taxes) - $150 (health insurance premium) = $584.16
Note: While these examples offer general gross pay, net pay, and withholding calculations, actual tax liabilities and withholdings may vary. For more detailed information on federal tax withholding requirements, visit the IRS Publication 15 (2025), (Circular E), Employer's Tax Guide. For more information on state tax withholding requirements, visit your state’s Department of Revenue or tax agency website.
Calculating total labor costs and labor cost percentage
Calculating your employees’ gross and net pay lets you know how much they earned during the pay period (gross pay), how much you’ll need to withhold and pay in taxes and deductions, and how much they’ll ultimately be taking home in their paycheck (net pay). But what calculating gross and net pay doesn’t tell you is the true labor cost for each employee.
The total labor cost is the true cost of an employee to your restaurant, including all employer-paid taxes, benefits, and other related expenses. Understanding your total labor cost is an absolute must, as it can help you more effectively budget, manage your restaurant’s revenue, and increase profitability.
The total restaurant labor cost calculation formula is as follows:
Total labor cost = Gross wages + Employer-paid payroll taxes (FICA, FUTA, SUTA) + Benefits (health insurance, retirement contributions, etc.) + Workers’ compensation premiums + Other labor-related expenses (if applicable)
While you can calculate the total labor cost for a specific employee, that would be extremely time-consuming. Plus, it’s generally unnecessary. Your restaurant payroll system should be able to provide this data for the entirety of your employee roster, allowing you to calculate and understand total labor costs across your restaurant staff.
In addition to total labor cost, another important metric you’ll want to understand for your restaurant is your labor cost percentage. Labor cost percentage shows how much of your total revenue you’re spending on labor, and plays a major role in your restaurant’s financial health, success, and profitability. (While actual labor cost percentage will vary based on a variety of factors—including restaurant type, location, and age—industry standards consider between 28 and 33 percent a healthy labor cost percentage.)
The formula for calculating labor cost percentage is as follows:
Labor cost percentage = (Total labor costs/Total revenue) x 100
Total Labor Cost/Labor Cost Percentage Example: Sarah’s Restaurant
Let's imagine Sarah's Restaurant has a team of 20 employees, and the owner, Sarah, wants to calculate total labor costs for the month. Sarah runs a report through her restaurant payroll system and gets back the following numbers:
Gross wages for all 20 employees (including regular pay, overtime, and reported tips): $45,000
Employer payroll taxes (which cover FUTA, SUTA, and the employer’s share of FICA taxes): $3450
Health insurance premiums (employer contributions): $2500
Retirement contributions (employer match): $1000
Workers’ compensation premium: $800
Other labor-related expenses (training, uniforms, etc.): $250
To calculate total labor costs, Sarah would simply add all of these numbers:
Total labor costs = $45,000 + $3450 + $2500 + $1000 + $800 + $250 = $53,000
Now, let’s say the total revenue for Sarah’s Restaurant was $165,000. To calculate labor cost percentage, Sarah would simply divide the total monthly labor cost ($53,000) by the restaurant’s total monthly revenue ($165,000) and multiply by 100:
Labor cost percentage = ($53,000 / $165,000) x 100 = 32.12
So, Sarah’s labor cost percentage is 32.12 percent, which is right within the ideal range of 28 and 33 percent, meaning that Sarah is efficiently managing her labor costs in relation to her revenue.
Step Six
How Long to Keep Payroll Records and Conduct Proper Documentation
Record keeping and documentation requirements
Alongside other types of restaurant documentation (like employee handbooks or restaurant employee management training materials), payroll records play an important role in restaurant compliance. Payroll retention—or, in other words, keeping accurate, up-to-date, and secure payroll records—is important for a few reasons, including:
Compliance. Your payroll documentation acts as compliance records, proving that you’ve been compliant with all relevant federal, state, and local wage and hour laws.
Audit protection. Maintaining accurate records can also offer legal protection should your restaurant ever find itself dealing with an IRS or Department of Labor audit.
Litigation protection. If an employee were to sue you for wage or labor violations, having a complete and accurate payroll history (along with all the related documentation) can prove you were compliant and in the right, and help you avoid legal action and penalties.
Security. Payroll documentation is full of personal, sensitive information, including contact information, Social Security Numbers (SSNs), and banking details. Maintaining payroll documentation on a secure restaurant payroll platform ensures that sensitive Personally Identifiable Information (PII) contained within payroll records is securely stored and protected.
Clearly, maintaining payroll records is important. But as a restaurant operator, what records do you have to keep—and how long do you have to keep them?
As an employer, you’ll need to comply with payroll recordkeeping requirements from both the IRS and the U.S. Department of Labor Wage and Hour Division/FLSA. These requirements include:
U.S. Department of Labor Wage and Hour Division/FLSA Recordkeeping Requirements:
Employee information. This includes the employee’s full name, SSN, address, occupation, date of birth (if younger than 19), and sex.
Hours worked. Employee payroll records should clearly show the time and day of the week the workweek begins, total hours worked each day, and the total hours worked each workweek. Records should also show time-related details like start time, end time, and any recorded breaks. (There is no universal timekeeping method; as an employer, you can track and record time however you wish, as long as it’s accurate and complete.)
Wages and deductions. In addition to hours worked, employee payroll records should also include documentation outlining their wages and deductions for each pay period, including the basis on which the employee’s wages are paid (for example, $10 per hour or $500 per week), the regular hourly pay rate, total straight-time earnings (daily and weekly), total weekly overtime earnings, any additions to or deductions from the employee’s wages, total wages paid per pay period, and both the date of the payment and the pay period covered by the pay period.
Additional documentation as applicable. Depending on your restaurant and employees, you may also need to keep additional documents on file, like any collective bargaining agreements.
Retention Requirements:
The U.S. Department of Labor Wage and Hour Division/FLSA requires employers to keep general payroll records and collective bargaining agreements for no less than three years. You’ll also need to keep records on which wage computations are based (like time cards, work schedules, and records of wage additions or deductions) for at least two years.
IRS Recordkeeping Requirements:
Employee identification number (EIN)
Amounts and dates of all wage, annuity, and pension payments
Amounts of employee-reported tips
Record of all allocated tips
Fair market value of in-kind wages paid.
Employee information (including names, addresses, social security numbers, and occupations)
Any employee copies of Form W-2 and/or W-2c returned as undeliverable
Each employee’s dates of employment for each employee
Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments made to the employee (by you and/or any third-party payers)
Copies of employees' and recipients' income tax withholding certificates (Including forms W-4, W-4P, W-4S, and W-4V)
Dates and amounts of tax deposits you made
Acknowledgment numbers for all deposits made via the Electronic Federal Tax Payment System (EFTPS)
Copies of all filed returns
Confirmation numbers for all filed returns
Records of fringe benefits and expenses reimbursements provided to your employees (including any substantiating documentation)
Substantiating documentation for any credits claimed, including records related to qualified sick leave wages and qualified family leave wages for leave taken after March 31, 2021 and/or records related to qualified wages for the employee retention credit paid after June 30, 2021,
Documentation to substantiate the amount of any employer or employee share of social security tax that you deferred and paid for in 2020
Retention Requirements:
The IRS requires retention requirements as follows:
Keep employment tax records for at least four years after the tax becomes due or is paid—whichever is later
If you file a claim for credit or refund after filing a return, keep records for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later
If you don’t report income that you should report—and that income is more than 25% of the gross income shown on your return—keep records for at least six years
Keep records related to qualified sick leave wages and qualified family leave wages for leave taken after March 31, 2021, and records related to qualified wages for the employee retention credit paid after June 30, 2021, for at least six years
If you do not file a return and/or file a fraudulent return, keep records indefinitely
Recordkeeping best practices for restaurants
At the bare minimum, as a restaurant, you need to comply with all the above-listed paperwork/documentation and retention requirements. But if the bare minimum doesn’t feel like enough, here are some best practices to keep in mind for your recordkeeping processes:
Consider indefinite retention. Recordkeeping requirements dictate that you keep certain types of payroll records for specific lengths of time (for example, four years for employment tax records under the IRS or three years for general payroll records under the FLSA). But those regulations can change, and if you want to be sure you have the documentation you need on file if and when you need it, consider keeping your payroll records indefinitely. This will ensure you have ongoing access to all of your payroll information, documents, and records—and you never know when you might need that access.
Regularly audit your payroll records. Just maintaining your payroll records isn’t enough; you also need those records to be complete and accurate for every employee and pay period. But the truth is, it can be easy for mistakes or errors to slip through the cracks, especially when you’re talking about huge sets of documents and forms, like payroll records, which is why, if you want to ensure accuracy and compliance, you should consider regular audits of your payroll records. By periodically auditing your records, confirming the accuracy of the information, and correcting any mistakes, you’re taking a proactive approach to recordkeeping—and if you ever find yourself in a situation where you need to provide those records (for example, an IRS audit or labor-related lawsuit), you can rest easy knowing your records are accurate, complete, and up-to-date.
Leverage technology for effective, accurate, and easy recordkeeping. Trying to manually maintain payroll records is a monumental job. But luckily, you don’t need to maintain these records manually—you can leverage technology to make the recordkeeping process easier, more effective and accurate, and less time-consuming. Most modern restaurant payroll platforms automatically manage digital recordkeeping, ensuring that all records are stored securely, compliantly, and in an organized way, making it easier to meet retention requirements and access payroll records when you need them.
Wrapping up: Efficient restaurant payroll operations are key to success
Effective payroll processes are an integral part of restaurant operations. And now that you understand both basic and advanced restaurant payroll concepts, you’re armed with the information you need to develop an effective approach to payroll, increase payroll efficiency, and ensure your payroll processes (including wage calculations, tax deductions and payments, employee payments, and recordkeeping practices) are both accurate and compliant.
As you’re applying this information to your own establishment, be sure to keep these restaurant payroll best practices in mind:
Keep your employees in mind. Because they’re directly tied to their paychecks, your payroll practices and processes will matter to your employees, so make sure you’re keeping them front of mind as you develop those practices and processes. For example, opt for a payment schedule that gets cash in your employees’ hands more frequently (like a weekly or bi-weekly schedule) and/or set up direct deposit, which offers faster access to their wages.
Prioritize accuracy and compliance. Accuracy and compliance are both critical parts of effective restaurant payroll management. Make sure that, as you navigate your restaurant’s payroll processes, you’re doing so in compliance with all applicable local, state, and federal laws—and that all of your numbers, whether that’s wage calculations or tip withholdings or tax or employee payments, are accurate.
Invest in the right technology. Restaurant payroll can be extremely complex. But with the right payroll system, it doesn’t have to be! Payroll platforms can automate every step of your payroll process, significantly reducing the time and energy needed to process payroll while also reducing the risk of errors or miscalculations. Look for payroll systems designed specifically for restaurants, which generally come equipped with features (like POS integration) that can simplify not only managing your payroll, but also managing your staff and your restaurant.
Keep meticulous records. As an employer, you’re required to keep accurate payroll records—and keep them on file for a set amount of time (ranging from two years to indefinitely). So, prioritize accurate, organized, and complete recordkeeping practices from the get-go; it can save you significant time, energy, and hassle down the road.
Mastering restaurant payroll can offer a variety of benefits, both to your restaurant (like increased compliance, reduced churn, and/or lower labor costs) and to your employees (like more accurate and timely payment). And by reading this guide, you’ve taken the first step towards mastery—and all the benefits that come with it.
For more information on how to navigate restaurant payroll and set up compliant payroll processes that benefit your restaurant and your employees, contact an experienced payroll, accounting, or tax specialist and/or visit the IRS’ small business tax resource page.