As explored in Part 1 of this blog series, your payroll accounting systems overlap with many different parts of your restaurant business. Your payroll solution can impact hiring, onboarding, employee payments, taxes, and overall business health.
For those new in the payroll field as well as industry veterans, the restaurant industry can come with unique challenges for running payroll. Multi-location and multi-state restaurant groups, in particular, need robust payroll solutions to address operational and accounting challenges.
This two-part blog series presents an overall guide to the essentials of payroll accounting for restaurant groups. Part 1 provides an overview of how you can leverage restaurant-specific payroll accounting software to address challenges and create new opportunities for your restaurant group.
Here in Part 2, more of the nitty-gritty details of restaurant payroll are covered, including regulatory considerations and how payroll software can help drive efficiency and accuracy in your payroll operations. Understanding core payroll concepts in the restaurant industry can help you understand what functionality you may want to leverage in a payroll solution.
How to create an accounting cycle and payment schedule for your restaurant
For many restaurants, the weekend provides significantly higher sales levels than a weekday. If a restaurant followed a 12-month calendar cycle, commonly used in other industries, a reporting period of a month would not have the same number of weekend days. Without a comparable number of weekend days, it is difficult to compare data month over month.
To ensure “apples to apples” comparisons, many restaurants opt for something like 13 four-week accounting cycles, or a 4/4/5-week accounting cycle. These restaurant accounting cycles level the reporting field between periods and provide useful information for operators.
Restaurant payroll follows these accounting cycles. The most common timeline for paying restaurant employees is every two weeks. Comparable accounting periods, like the ones mentioned above, allow you to run your payroll for employees weekly or bi-weekly. Your restaurant may also consider implementing an even more frequent payment schedule (discussed in Part 1).
Understanding payroll regulations
In general, payroll is a heavily regulated industry, and many of the most complex regulations overlap with the restaurant industry. For example, one common area for regulations covers how hourly employees are scheduled. Local, state, or federal laws may regulate breaks, shift length, schedule predictability, and other areas. Other laws regulate tipped workers, designating minimum wages and rules around pooling shared tips.
No matter what laws your restaurant group falls under, it is beneficial to prioritize recordkeeping and audit trails to demonstrate compliance with labor and pay regulations. It is not enough that your company is following regulations; you also must be able to demonstrate compliance within your records. Payroll software can play a central role in helping you comply with regulations and ensure that your employees are paid correctly and on time.
Meeting ACA obligations with shifting schedules
A particularly thorny area of regulations for restaurants is making sure you are meeting your obligations under the Affordable Care Act (ACA). The ACA requires employers to offer full-time employees compliant health insurance coverage and document this offer for the IRS. Employers with 50 or more full-time employees, as well as self-insured employers, are required to offer these benefits.
Staying compliant with the ACA requires robust recordkeeping for employers in general. As an employer, you need to track your full-time employees, defined as employees who work an average of 30 hours or more per week for more than 120 days per year.
In addition, your restaurant may also hire many part-time, “variable-hour” employees, or seasonal or temporary employees. You may not know if an employee will meet the full-time qualification at the time you hire. Your restaurant must be able to understand at what point you are required to offer benefits to different employees under ACA rules.
Staying compliant requires a robust data-tracking solution. For many restaurants, data from HR, schedules, attendance, and payroll are all tracked in different systems, thus making it difficult to extract and consolidate data for IRS reporting. However, if your payroll, accounting, HR, and scheduling systems are fully integrated, you are set up for success with streamlined reporting capabilities to help meet your compliance obligations.
Managing multi-unit payroll in multiple states
Local, state, and federal laws about labor and payroll can vary, which can present a challenge for restaurant groups with multiple restaurant locations. Multi-unit payroll requires you to stay up to date on regulations on the local, state, and federal level.
Varying regulations may touch everything from minimum wage to rules about income tax withholding. Compliance may also require companies controlling multiple locations to count all employees at all locations to determine if they are considered a “large employer” under ACA and therefore required to provide the above-mentioned health coverage. Your restaurant payroll solution should accommodate multi-state payroll, allowing you to process different withholding tables, minimum wages, and complex reporting.
Classifying workers correctly
Understanding the U.S. Department of Labor rules and state guidelines for worker classification is more important than ever. The most common worker classifications include:
- Exempt, salaried, do not earn overtime (in restaurants, most commonly your managers)
- Non-exempt, hourly, receive overtime (most commonly hourly staff)
- Independent contractor, on contract
Especially as regulations increase around “gig economy” roles, restaurants should be aware of the steep penalties for misclassifying workers. Your payroll software should allow for clear classifications of workers as well as enable appropriate recordkeeping around job duties and the relationship with a worker.
Who qualifies as a tipped employee?
Under the Fair Labor Standards Act (FLSA), tipped employees are “those who customarily and regularly receive more than $30 per month in tips.” Most regulations require restaurants to make up the difference between tips and the applicable minimum wage. However, regulations around tipped employees can vary widely by state, making compliance more complex for multi-state restaurant businesses.
Tip recordkeeping, calculating tip credits, and correctly monitoring payroll for tipped employees can pose a challenge particularly for restaurants with multiple locations, so staying on top of your records is critical to avoid fines and penalties. Your payroll and accounting integration should be able to track employee tip totals, the amount of tip credits for each employee per pay period, and tipped employee hours worked.
Calculating earnings and deductions for your staff
Federal, state, and local regulations govern how you calculate tipped wages, withholding, and overtime based on gross pay for employees. Payroll software can help provide reporting for each of these areas and ensure that you comply with the deductions you set up for employees.
In addition, as an employer, you will be tracking your own deductions for your restaurant, such as the cost of providing meals to employees at your restaurant (unless they fall under “de minimis” benefits and therefore are not taxable).
Tax considerations for restaurant payroll
Your restaurant business will pay payroll taxes based on the wages you are disbursing to employees. The largest of these taxes are the two federal payroll taxes, a 12.4% tax to fund Social Security (FICA), and the second is a 2.9% tax to fund Medicare (MEDFICA), for a combined rate of 15.3%. Half of these taxes (7.65%) are taken out of workers’ paychecks, and half (7.65%) are remitted by employers directly.
Tips may be considered taxable income for the purpose of calculating payroll tax. For the restaurant industry, you may be able to leverage payroll tools like daily tip reports to calculate employee income numbers and report tips accurately.
How long should you maintain restaurant payroll records?
Your restaurant needs to not only follow payroll regulations, but also be able to proactively prove that you are following regulations. Documenting compliance for restaurants is particularly important for laws around minimum wage, overtime, and tipped employees, which may fall under scrutiny.
The general guideline in the payroll industry is that most businesses should maintain payroll records for three years. However, some businesses that are experiencing special circumstances, like a missed return, fraudulent return, or misreported income, may need to maintain records up to six years.
Whatever your timeline, it’s important to have a payroll accounting database, like a web-based software solution, that doesn’t purge employee data. With payroll software, you can have access to a full audit trail with information stored in a secure database.
Understanding the basics of restaurant payroll accounting is critical to getting the most out of your payroll solution. Payroll software can help your restaurant comply with regulations, as well as improve business operations. If you’d like to share the concepts in this blog post with your colleagues, suggest they watch the recorded webinar.
Restaurant365 incorporates Payroll + HR software, scheduling software, accounting software, restaurant inventory management software, and restaurant operations software into an all-in-one, cloud-based platform that’s fully integrated with your point-of-sale system, as well as to your food and beverage vendors, and bank.