Restaurants And Their Unique Payroll Challenges

Restaurants can find payroll compliance very challenging since they’re governed by so many complex laws and responsibilities. Here are a few of the unique payroll challenges restaurants face and what you can do to meet compliance.

Tip Income

Employers must report tip income for each pay period and collect taxes on the tips. You can calculate the total tip income by your restaurant’s total receipts for the pay period, by hours worked, or as reported to them by employees, but it must be at least 8 percent. You must collect federal income and unemployment tax, state and local income taxes, state unemployment tax, Social Security, and Medicare taxes.

If your restaurant adds a service charge to a customer’s bill and then distributes the “tip pool” amongst employees the IRS considers this money wages. This can be done for front and back-of-house employees, provided they are not receiving a tip credit.

Automatic gratuities added to the bills of banquets or large parties (typically 18 percent or more), is not employee income. Instead, it is restaurant revenue subject to sales tax.

The IRS takes tips very seriously since they’re taxable income. According to a PayScale Tipping Study, tips account for around 58 percent of a waiter or waitress’ earnings.

FICA Tip Credit

If a minimum wage employee earns tips of $30 or more, employers may apply the FICA tip credit to the wage requirement and reduce their employment costs. The maximum credit is $5.12 per hour. Here’s an example of how it works.

A server federal minimum wage is $7.25 an hour for 20 hours a week, or $130. The minimum cash required wage is $2.13, or $47.60. The minimum wage minus their minimum cash required wage is $130 minus $47.60, or $82.40. The server needs to make $82.40 in tips so their earnings meet the federal minimum wage requirement, or the employer must pay the difference. However, Massachusetts requires employers to pay tipped employees above federal minimum wage. Employers can’t claim a tip credit for employees that work on a tip-only basis.

Employers that improperly retain tips from an employee receiving a tip credit are subject to a $1,000 per incident fine and possibly other damages too. Tips are the property of the employee.


The IRS considers meals a fringe benefit and employers can deduct the costs off employee wages under certain circumstances. Meals must be provided on the premises and served so the employee doesn’t need to leave the premises.

Ensuring Compliance

Restaurants bear most of the burden for reporting tip income accurately. If the IRS finds a discrepancy, they check your payroll first.

The complexities of restaurant payroll demand a reputable payroll company like Charlotte Payroll. We have the employment and tax legislation expertise you need and rely on leading edge payroll technologies.

We prepare and file your payroll remittance and ensure local, state, and federal authorities receive their due each quarter. In the unlikely event we fail to do so, we pay the penalty.

Contact us so we can explain what we can do for your restaurant.

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