Restaurant Payroll: How to Manage Paychecks, Tips, and Taxes

Restaurant payroll isn't like payroll anywhere else. You're juggling cash tips and credit card tips, tipped wages and minimum wage, overtime that kicks in mid-shift, and tax rules that change by state. Miss a decimal point or misreport tips, and you're looking at penalties that eat into already-thin margins.

This guide walks you through how restaurant payroll actually works, from setting up your system and tracking time to calculating tips, filing taxes, and avoiding the mistakes that cost you money. Whether you're opening your first location or finally ready to ditch the spreadsheets, you'll learn what you need to pay your team right, stay compliant, and stop losing sleep over payroll.

TL;DR: Restaurant payroll

What it is: Restaurant payroll covers hourly wages, tips (cash and credit card), overtime, payroll taxes, and compliance with federal and state labor laws.

Why it's tricky: You're dealing with tip credit rules, multiple pay rates per employee, tip pooling, variable schedules, and strict recordkeeping requirements that change by location.

How to run it: Track time accurately, calculate wages and tips, withhold taxes, file on time, and keep detailed records. You can do it manually, hire an accountant, or use payroll software that handles calculations and tax filings automatically.

Common mistakes: Misreporting tips, misclassifying workers, manual calculation errors, missed tax deadlines, and poor recordkeeping.

Bottom line: Get payroll wrong and you're facing penalties, back wages, and audits. Get it right and your team gets paid accurately, on time, every time.

What is restaurant payroll?

Restaurant payroll is how you pay your team: hourly wages, tips, taxes, and the recordkeeping that comes with it. You track hours, calculate what everyone's owed, withhold taxes, and make sure paychecks land on time.

But it's not like payroll anywhere else. Your servers work on tips and switch between roles at different pay rates. You're managing cash tips, credit card tips, tip pooling, and tip credit rules (where allowed by your state), all while staying compliant with labor laws that change by state. 

In some states, you can use tip credit to pay below minimum wage if tips make up the difference. Other states require you to pay full minimum wage before tips. Add in high turnover and variable schedules, and you're constantly onboarding new hires while making sure no one gets shorted on overtime or tip reporting. Mess it up and you're facing penalties from the IRS or Department of Labor.

Key components of restaurant payroll

Running restaurant payroll means managing several moving parts at once. Here's what you're dealing with.

Hourly wages and multiple pay rates

Most of your team is paid hourly, but the rate isn't always the same. A server might earn $2.13 per hour during dinner service, then switch to $7.25 per hour for side work. Someone working as both a bartender and a barback could have two different rates in the same week. Your payroll system needs to track which role they worked, for how long, and calculate wages accordingly.

Tips: reported, pooled, and credited

Tips complicate everything. You're managing cash tips employees report at shift end and credit card tips that get added to paychecks. In states that allow tip credit, you can pay tipped employees below minimum wage as long as their tips bring their total compensation up to at least the standard minimum wage (currently $7.25 federally). If your team pools tips, you need a system to collect, calculate, and distribute them fairly. All of it has to be reported accurately for taxes.

Overtime and break rules

Overtime kicks in after 40 hours federally, but some states have daily overtime rules. California requires overtime after 8 hours in a single day. Your payroll system needs to calculate this correctly based on where you operate and which pay rate applies if someone worked multiple roles. Break rules vary by state too. Miss a required break and you could owe penalty pay.

Payroll taxes and withholdings

Every paycheck means withholding federal income tax, Social Security, Medicare, and state income tax. You're also paying employer-side payroll taxes. For tipped employees, you're withholding both wages and reported tips. When tips are high and wages are low, the taxes owed on tips can exceed the employee's hourly paycheck, which means you may need to withhold the difference from future paychecks or collect additional amounts to cover the tax liability.

Time tracking accuracy

Accurate time tracking is the foundation of payroll. You need exact start and stop times, break durations, and which role someone worked during each shift. Manual time cards leave room for errors, forgotten clock-outs, and disputes over hours worked.

How to set up payroll for your restaurant

Setting up restaurant payroll correctly from the start saves you from compliance headaches and costly fixes later. Here's what you need to do.

1. Get your EIN and register for taxes

You need an Employer Identification Number (EIN) from the IRS. This is how the federal government identifies your business for tax purposes. You'll also need to register for state and local payroll taxes, which varies by location. Some states require unemployment insurance registration. Others have additional withholding requirements. Check with your state's labor department to make sure you're registered everywhere you need to be.

2. Decide on pay frequency

Most restaurants pay weekly or biweekly. Weekly payroll means more work for you but steadier income for your team. Biweekly payroll cuts your processing time in half but means employees wait longer between checks. Check your state's labor laws for minimum pay frequency requirements, as some states mandate specific payment schedules.

3. Classify your employees correctly

Misclassifying workers is one of the most expensive payroll mistakes you can make. Most restaurant workers are W-2 employees, not 1099 contractors. The IRS looks at control, independence, and the nature of the relationship. If you set their schedule, provide their tools, and direct how they do their work, they're employees. Contractors work independently, set their own hours, and control how they complete projects. When in doubt, classify as an employee.

4. Collect required forms from every new hire

Before someone's first shift, you need a completed W-4 (for federal tax withholding), I-9 (to verify work eligibility), and state withholding form if your state requires one. You'll also need their Social Security number, address, and direct deposit information. Keep copies of everything. The I-9 needs to be available for inspection, and the W-4 determines how much tax you withhold from each paycheck.

5. Choose a payroll system

You can run payroll manually with spreadsheets and calculators, hire an accountant or bookkeeper, or use payroll software. Manual payroll is the cheapest option upfront but takes hours and leaves room for expensive errors. Accountants handle the math and filings but charge per payroll run. Payroll software automates calculations, tax withholdings, and filings while giving you control over timing and access to reports.

Restaurant payroll process: From time clock to paycheck

Once your payroll is set up, here's how you actually run it, week after week.

Track time accurately

Payroll starts with knowing who worked when and for how long. Your team clocks in and out for each shift, and you need accurate start times, end times, breaks, and role changes captured in your system. If someone switches from server to host mid-shift, you're tracking that to pay the right rate for each portion. Manual time cards create problems: forgotten clock-outs, messy handwriting, and math errors when you're tallying hours late Sunday night. Digital time tracking captures exact times and handles the calculations automatically.

Calculate wages and tips

Once you have hours, you calculate what everyone's owed by multiplying hours by rate, accounting for role changes, and adding overtime if anyone crossed 40 hours. For tipped employees, you're combining base hourly wage with reported tips. If you're using tip credit and paying someone $2.13 per hour, you need to verify their tips brought them up to minimum wage or you owe the difference. Tip pooling adds another layer: collect the pool, calculate each person's share based on your distribution method, then add those amounts to paychecks.

Apply deductions and withholdings

Before anyone gets paid, you're withholding federal income tax, Social Security, Medicare, and state income tax based on each employee's W-4 and earnings. You're also withholding taxes on reported tips. Sometimes the tax owed on tips exceeds the employee's hourly paycheck, especially for tipped workers earning $2.13 per hour, which means you need to collect the difference or withhold it from future checks. Other deductions might include health insurance, retirement contributions, or garnishments.

Run payroll and distribute paychecks

After calculations and withholdings, you process payroll through direct deposit or paper checks. Direct deposit means submitting a file to your bank with everyone's net pay and account information. Either way, employees get a pay stub showing gross pay, deductions, and net pay. As one restaurant owner told us: "Before Homebase I was manually tallying up my team's work hours and entering them into payroll, crossing my fingers I hadn't made any mistakes. Now our entire team logs in and out quickly and easily, and all I have to do is send their hours to my payroll program with the click of a button."

File taxes and maintain records

Running payroll means paying employer payroll taxes and filing reports. Federal payroll taxes are due monthly or semi-weekly depending on your size. You need to file quarterly reports (Form 941) and annual reports (W-2s, Form 940). Miss a deadline and penalties add up fast. You also need to keep payroll records for at least three years under federal law: timecards, pay stubs, tax forms, and payment records.

Common restaurant payroll mistakes to avoid

Even experienced restaurant operators make payroll errors. Here are the ones that cost you the most.

Tip misreporting

Underreporting tips is one of the most common violations the IRS looks for in restaurants. For large food and beverage establishments (generally those with more than 10 employees where tipping is customary), the IRS requires tip allocation if reported tips fall below 8% of gross receipts. While this isn't a universal audit trigger for all restaurants, accurate tip reporting is critical for tax compliance. 

If you're using tip credit to pay tipped employees below minimum wage, you need solid documentation proving their tips actually made up the difference. No documentation means no tip credit, and you could owe back wages plus penalties that add up fast.

Worker misclassification

Classifying employees as independent contractors to dodge payroll taxes backfires when you get audited. Reclassified workers mean you're suddenly liable for back taxes, penalties, unemployment insurance, and workers' comp premiums you should have been paying all along. Misclassifying employees as exempt from overtime is equally expensive. A shift lead who spends most of their time doing the same work as hourly employees isn't exempt just because you call them a manager or pay them a salary.

Manual calculation errors

Calculating payroll by hand invites mistakes: forgotten overtime, wrong pay rates, miscounted hours, botched tip distributions. Every error means either underpaying someone and owing back pay, or overpaying them and creating awkward conversations about deductions. The later in the week you're running numbers, the more likely mistakes happen.

Missed tax filings and deadlines

Payroll taxes have strict deadlines with no wiggle room. Miss a deposit deadline and penalties start at 2% of what you owe. Miss quarterly filings and penalties stack. W-2s must be provided to employees and filed with the Social Security Administration by January 31. Every late form means more penalties eating into your already thin margins.

Poor recordkeeping

Federal law requires you to keep payroll records for at least three years: timecards, pay rates, hours worked, wages paid, tips reported. When an employee disputes their pay or the Department of Labor shows up with questions, "I don't remember" or "we threw those out" won't protect you. Paper records get lost or damaged. Digital records with automated backups give you the documentation you need when you need it.

Should you run payroll in-house or outsource it?

You have three options for handling restaurant payroll. Here's how they compare.

Manual payroll

This means you're doing everything yourself with spreadsheets, calculators, and paper forms. You track hours, calculate wages and tips, figure out tax withholdings, write checks, and file tax forms on your own.

• Cost: Free, except for your time.
• Time investment: Hours every pay period, plus tax filing time quarterly and annually.
• Error risk: High. You're doing complex math late at night after long shifts, and mistakes cost money.
• Scalability: Doesn't scale. Works for a tiny operation with two or three employees. Falls apart when you're managing 15+ people across multiple roles and shifts.

Accountant or bookkeeper

You send your time tracking data to an accountant or bookkeeper, and they handle the calculations, tax filings, and compliance. They process payroll on your schedule and make sure everything's filed correctly.

• Cost: Typically $50 to $150+ per payroll run, depending on team size and complexity.
• Time investment: Low. You're mainly responsible for getting them accurate hours and approving payroll.
• Error risk: Lower than manual, but you're still relying on someone else's accuracy and availability.
• Scalability: Scales better than manual, but costs increase as your team grows.

Payroll software

Software automates the calculations, tax withholdings, and filings. You input hours (or they sync automatically from your time clock), review everything, and approve. The software handles the rest, including direct deposits and tax payments.

• Cost: Monthly subscription, usually $30 to $150+ depending on features and team size.
• Time investment: Minimal. Most of the work is automated.
• Error risk: Low. The software handles complex calculations and stays updated on tax law changes.
• Scalability: Scales easily. Adding employees doesn't multiply your workload.
• For most restaurants, payroll software hits the sweet spot between cost, accuracy, and time savings.

Restaurant payroll software: What to look for

Not all payroll software handles restaurant-specific needs. Here's what actually matters.

Tip handling

The software needs to manage both cash and credit card tips, calculate tip credit correctly, and handle tip pooling. It should let you track tips by employee, verify that tipped workers are meeting minimum wage requirements, and distribute pooled tips based on your rules (hours worked, points, roles). If it can't handle tips properly, it's not built for restaurants.

Tax filing and compliance

Good payroll software calculates federal, state, and local taxes automatically and files them on time. It should handle quarterly reports (Form 941), annual filings (W-2s, Form 940), and new hire reporting without you lifting a finger. Look for software that updates automatically when tax laws change so you're not stuck researching new requirements every time your city adjusts its minimum wage.

Time tracking integration

Your payroll software should connect directly to your time clock system. Manual data entry between systems creates errors and wastes time. When your team clocks in and out, those hours should flow straight into payroll with the correct pay rates, overtime calculations, and role distinctions already applied.

Multi-location support

If you operate more than one location, you need software that can handle different tax jurisdictions, separate labor cost reporting, and location-specific pay rules without forcing you to run payroll separately for each site.

Mobile access

You're not always at a desk when payroll needs to run. Mobile access means you can review hours, approve payroll, and handle issues from anywhere. One restaurant owner told us: "I've run payroll from sitting on a horse moving cattle."

Tools like Homebase connect time tracking, scheduling, and payroll in one system. Your team's hours sync automatically, tips get calculated correctly, and taxes get filed on time without manual work.

FAQ: Restaurant payroll essentials

How to do payroll for a restaurant?

Start by tracking your team's hours with a time clock that captures exact start and stop times, breaks, and role changes. Calculate wages by multiplying hours by pay rates, then add overtime for anyone over 40 hours and include reported tips for tipped employees.

Withhold federal income tax, Social Security, Medicare, and state taxes based on each employee's W-4. Process payments through direct deposit or checks. File required tax reports quarterly and annually. Keep records of timecards, wages, tips, and tax withholdings for at least three years.

How much should payroll be in a restaurant?

Most restaurants aim for payroll costs between 25% and 35% of gross sales. Quick-service restaurants typically run 25% to 28%. Full-service restaurants with table service often run 30% to 35%.

Your target depends on your menu prices, service model, and local wage rates. Higher-end restaurants with extensive service staff will naturally run higher labor percentages. Track your labor cost percentage weekly and adjust schedules based on forecasted sales to stay within your target range.

What is the 30 30 30 rule for restaurants?

The 30 30 30 rule suggests restaurants should spend roughly 30% of revenue on cost of goods sold, 30% on labor costs, and 30% on operating expenses, leaving 10% as profit.

In reality, most restaurants don't hit these exact numbers. Food costs often run 28% to 35%. Labor frequently exceeds 30%, especially in high-wage markets. The rule works better as a starting benchmark than a strict target. Focus on tracking your actual percentages and finding what's sustainable for your specific operation.

A smarter way to run restaurant payroll

You didn't open a restaurant to spend Sunday nights calculating tip pools and tax withholdings. Homebase handles the complicated parts automatically. Your team clocks in and out from their phones or a tablet. Their hours sync directly to payroll with the right pay rates already applied. Tips get calculated and reported correctly. Overtime gets flagged before it hits your labor costs. Taxes get withheld and filed on time without you lifting a finger.

We've processed billions in payroll for restaurants just like yours. Our system knows tip credit rules, pooling calculations, and the labor laws that apply to your state and city. As one restaurant owner told us: "Before Homebase I was manually tallying up my team's work hours and entering them into payroll, crossing my fingers I hadn't made any mistakes. Now all I have to do is send their hours to my payroll program with the click of a button."

Stop doing payroll the hard way. Try Homebase free and see how fast you can go from time clock to paycheck without the headaches.

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