If you own a restaurant, you may have significant questions about tips. You might wonder, for example, who exactly are the tipped employees. You may also have to ask questions like “are tips taxable?” and “can my employees pool tips?” in order to make your budgets and ensure that you operate at a profit. The truth is that tips are both more and less complex than you might think, but they make up a vital part of how your business will function financially. As such, it’s important to keep at least five major factors in mind when you’re dealing with this part of your business.
Basic restaurant payroll issues
Unlike many other business practices, outsourcing payroll is almost exactly what it sounds like. Rather than going through the payroll process in-house, a business can choose to outsource various aspects of the process to an outside company. Generally speaking, this company will do most of the heavy lifting when it comes to matters of payroll, including not only factors like processing, but also keeping track of tax matters and even dealing with industry-specific compliance issues. Companies that choose to outsource do so for a number of reasons, but it’s fairly common no matter what industry at which you choose to look.
Things to know about paying tipped employees
One of your primary financial issues during restaurant payroll will be figuring out how to pay tipped employees correctly. What is a tipped employee? According to federal guidelines, it’s any employee that routinely makes at least thirty dollars a month in tips. As you might imagine, it’s quite common for restaurant workers to fall into this category and thus you’ll have to know how to deal with them.
One of the major issues with restaurant payroll in dealing with tipped employees is learning exactly how they should be paid. According to federal law, tipped employees only have to be paid around 2.13 an hour if that wage plus their regular tips equals the federal minimum wage. At least, that holds true in most states – according to some state laws, even your tipped employees must be paid the state minimum wage even before tips are added.
If your employees aren’t making the minimum wage after tips, it’s up to you as an employer to make up the difference. This means that if an employee is making less in tips than he or she would need to meet the minimum wage, you will have to pay the difference. Given that tips typically make up more than half of a restaurant server or bartender’s wage, failure to meet that mark can be tougher on the server than on the business owner. It is, though, important that you remember your responsibility to make sure that your employees are bringing in at least the state-mandated minimum wage so that you are able to stay on the right side of your state’s labor laws.
FICA tip credit
As an employer, you have a duty to pay taxes on the earnings of your employees. For most business owners, this is simple. When you’re dealing with a restaurant, though, things can get a little more complex. Because tips are calculated as part of an employee’s wages, it’s still the job of the business owner to pay taxes on those earnings. To ensure that business owners are keeping up with their restaurant payroll and the tips of their employees, and that employees are properly reporting their earnings, the federal government has created a program that is commonly known as the FICA Tip Credit.
This tax credit is filed when the business files its taxes and can save a business quite a bit of money over the course of a year, especially if it has multiple tipped employees. Any tips that help to put an employee over federal minimum wage can count towards this credit, which in turn helps to reduce the tax burden of the employer. As such, it helps to ensure that employee tips are encouraged and that employers work to make sure that their employees make more than the federal minimum wage. It’s a system that truly helps everyone.
Unfortunately, qualifying for this tax credit does require a fair bit of paperwork. On one hand, the business needs to keep very precise records of how much each employee makes on his or her tips. On the other hand, it also puts the business in the position of having to rely upon its servers to be honest about the tips they bring in. This means that the cash tips an employee makes absolutely cannot be considered “under the table” and that employers have to make reporting tips into part of the business’ culture. It takes a bit of effort to make this work, but it improves the system for everyone.
Restaurant employee meal policies
It’s not uncommon for restaurant employees to receive some type of meal-related perk while they’re on (or even off) the clock. When one is surrounded by food all day and likely doesn’t have much time to stop and eat, it only makes sense to give workers a chance to grab something nearby. As an employer, figuring out what your employee meal policy should be is actually a vital part of your book-keeping and restaurant payroll process. You have to figure out if providing a free meal is actually something that can work for your restaurant.
On one hand, free meals are actually a tax deduction for your business. If you offer employees free meals – even if they’re offered at a specific time or place – they count as a free employee meal and can be written off on your taxes. If you choose this route, you’ll have to deal with the loss of profits that come from providing free meals and set up a system to ensure that all of your employee meals are properly logged. Record keeping can be important here, so make sure that you’re willing to do the paperwork.
There are many good reasons to avoid free meals, of course. The biggest one is always cost – free meals do cost your company money and they certainly slow down the turnaround time on the meals cooked for your customers. Figuring out if you can afford to offer free meals is more than just a matter of math, though. If you see that offering free meals will help the morale of your employees and help to reduce your turnover, you might want to take the financial loss in this arena in order to keep your costs down in others.
Overtime policies for restaurant workers
Overtime is one of the bigger problems in the restaurant industry. After all, margins are typically fairly slim in most restaurants and labor costs account for a huge part of the business’ overhead. Even with this in mind, though, it’s still important to remember that the typical overtime rules still apply to your employees. If an employee works more than forty hours per week, he or she is entitled to time and a half. This means paying significantly more even if your labor costs are already sky-high. As you might imagine, avoiding overtime costs is a huge part of keeping a good restaurant afloat.
One of the best ways to deal with overtime costs is to pay attention to who is working and when. This doesn’t just mean making sure not to schedule your employees for more than forty hours. It also means that you’ll need to ensure that you aren’t asking employees to stay after their shifts during a rush and that you’re giving those who are coming close to the cap a chance to leave early when and if necessary. You’ll also have to keep an eye on shift-switching and covering, as any of these moves can put an employee over that threshold.
Despite the monetary issues that overtime might bring your business, it’s vital that you follow the rules. Not only is a failure to pay overtime a great way to lose a valued employee, but you can also receive enormous fines if and when you are reported to your state’s labor board. As such, make sure that you pay attention to your restaurant payroll and any potential overtime work in your business and make sure that even those who are working just forty-one hours a week are given the correct payment for that single overtime hour. Doing so will help you to avoid falling afoul of strongly-enforced regulations.
Benefits and deductions
Benefits are a highly sought-after part of the overall employee compensation package. After all, employees don’t just want a paycheck – they want the security that comes with knowing that they’ll be cared for if they get sick or need time off. In fact, a lack of benefits is something that routinely comes up in exit interviews. Unfortunately, many restaurants operate on such a tight budget that offering benefits can be financially painful. Figuring out how to offer benefits and keep your doors open at the same time is one of the puzzles that you will have to solve as a restaurant owner.
If you have a small restaurant, the good news is that you technically aren’t required to offer any kind of health insurance benefits. Only business with at least fifty full-time employees have to offer health care benefits, so the average restaurant won’t qualify. It is, however, something you may still want to offer. Since benefits are so rare in the restaurant industry, you’ll stand a better chance of attracting top talent and keeping your best employees. Even other benefits like cash bonuses or paid time off might be enough to attract the best workers in your region.
One of the easier ways to offset benefits is by taking the right tax deductions. Fortunately, there are a host of great deductions that can be taken by virtually any restaurant. Food costs, overhead costs, and even the cost of advertising can all be deducted on your tax forms. You’ll likely need the help of a professional to maximize all of your deductions, but doing so will help you to greatly reduce your tax burden each year. Once you’ve got your deductions squared away properly, you’ll find that you’ve got more money available and more of a chance to provide the kind of incentives that will keep your best employees working for you.
Common errors in paying tipped employees
Given the difficulties in paying tipped workers, you should be able to imagine that there are quite a few mistakes that get made in restaurant payroll by even seasoned owners. These errors range from the minor to the truly major and they can hurt both your business’ bottom line and the morale of your employees. Avoiding some of the biggest mistakes means paying closer attention to how your employees are paid and how your employees are tipped. Fortunately, doing so can become second nature once you get into the habit.
Many businesses have issues making sure that their employees are paid the correct amount of money. Remember, you have to make the difference between an employee’s tips and the minimum wage. That means keeping track of what every employee is tipped during the pay period and making sure that your employees are receiving at least the state’s minimum wage on their paycheck. If you can’t manage to do the math on this one, you’ll either have to switch over to a more typical wage scale or you’ll find yourself continually under-paying or over-paying all of your employees. It’s not a situation in which you want to put yourself, so consider working with technology that can augment your own mathematical abilities.
It’s also very common to run into problems concerning overtime. As discussed before, every minute working over the forty hour mark does require you to pay the employee one and a half times his or her normal wage. Unfortunately, the number of hours for which an employee is scheduled and the number of hours he or she works don’t always line up in the restaurant world. As such, you’ll want to keep a very close eye on the time that your employees actually work and make sure that the amount you pay them actually lines up with the amount that they should be owed.
The nature of working with tipped employees makes it more difficult to deal with the restaurant payroll than in many others. Whether you are a seasoned professional or a new restaurant owner, you may need a bit of help to make sure that you are doing everything correctly. If you’re ready to start bringing in new tipped employees and you want to make sure that everything is done correctly, make sure to contact PayTech about the New Employee Welcome Packet to help your employee onboarding process run quickly and efficiently.