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Always on the Menu: Restaurant Payroll Challenges

January 28, 2016 | posted by Abacus Payroll
Restaurant Payroll Tips

When you dream of opening a restaurant, running payroll isn’t always the first concern. However, restaurant payroll has it’s own challenges and obstacles that employers need to be aware of.
The restaurant scene can be chaotic at best. Even if you forget the factor of newly trained employees and the resulting record errors, the fact remains that tips and auto-gratuities throw a huge wrench into the works. While no system is perfect, the following information should help you fine-tune your establishment and avoid misreporting thousands of dollars in revenue.

Tips and Taxes for Restaurant Payroll

Your employees should be aware that tips are taxable income. As an employer, the law requires you to withhold federal income tax, unemployment, and Medicare from tips exceeding $20 per month. Since most employees average at least that on a daily basis, plan accordingly.
On the flip side, employees have to report their tip income as long as it exceeds the $20 limit. Often, the idea that tips factor into taxable wages seems dissonant to new hires, so make sure you inform your employees that their tips count as part of a sum in addition to their hourly rate. If they don’t report a minimum collective of 8 percent of the restaurant’s total earnings from tips, you have to make up for the difference by allocating manual tips via W-2.

Restaurant Payroll: Abacus Payroll’s Easy Tip Tax Paycheck Calculator

Depending on your state’s legislature, you may be able to use a certain percentage of your employees’ tax income to make up for a reduced minimum wage. Check with your state law to see what the mandatory minimum wage is.

Federal minimum hourly wage for tipped employees is currently $2.13. Refer to the Department of Labor for each state’s wage, tip, and tax requirements.

Though most net income in the service industry qualifies for tax withholding, there are a few exemptions. For example, the IRS classifies free meals or drinks on the job as fringe benefits as you don’t require your employees to leave for their lunch break. In this event, you negate the value of the meal, and the IRS considers the whole deal nontaxable.

Automatic Gratuities

When a party of a certain size reserves a space, most restaurants charge an automatic gratuity of 18 percent or more. Because of recent legislature, the IRS considers auto gratuities restaurant revenue rather than server income, which leads to sales tax on the gratuity.
Furthermore, the IRS classifies gratuities as service charges rather than tips, simply because the customers lose the autonomy of the tipping process when charged with an automatic gratuity. As such, employers must withhold payroll taxes, such as income tax, from auto gratuities directly.
If you are unclear if the additional charge is considered a tip or an automatic gratuity, the IRS uses the following criteria to describe a tip:

  • The customer’s payment is at free will with unrestricted right in choosing the amount
  • Payment percentage or amount is not subject to negotiation or dictated by employer policy.
  • Generally, the customer has the right to determine which server or employee receives payment.


Staying Organized

Whether you’re a franchisee operating a chain restaurant or managing your own independent establishment, there can be a lot going on at any given moment during your restaurant’s business hours. From a restaurant payroll standpoint, it is important to stay organized with your payroll and HR reporting and paperwork. It can be a very costly mistake to submit incorrect wage and hours for your staff or mess up when it comes to overtime pay. You also need to maintain accurate records including time sheets, tip reports and allocations, FICA tax payments and withholdings, W-4 forms for your employees, and if your restaurant is considered a large food or beverage establishment, Form 8027.

Asking your servers or tipped employees to record their tips consistently using Forms 4070 and 4070-A can help both you and the employee stay organized and compliant.


More comprehensive tax information for restaurant payroll managers can be found on the Restaurant Tax Tip section of the IRS website.


Accurate tip reporting and restaurant payroll compliance is always on the menu. Even with a solid grasp of the above concepts and a fluid operating system, you’ll never be able to account for every setback. Don’t wait until you’ve lost money—call Abacus Payroll today at 856-667-6225 to find out how you can more accurately report your revenue and stay on top of your restaurant payroll. Email us for more information.

About the Author: Abacus Payroll

Abacus Payroll, Inc. is a leading provider of payroll solutions for businesses of all sizes. Whether yours is a family-owned small business or a national corporation, we provide payroll, tax and other financial services on time and at an affordable price. Unlike other payroll providers, Abacus Payroll will assign your very own payroll specialist who will understand your payroll needs inside and out. So no more speaking to a different person each time, no more sitting on hold for hours and most importantly no more missed deadlines! Contact us today to see how we can help your business. You can count on us.