Unlike other forms of traditional employment, such as salaried or hourly workers, restaurant payroll has specific requirements that make it much more challenging than the average business. When you’re paying your staff, you need to take into consideration the way restaurant wages are taxed and governed. Here are some basics to get you started in the right direction:

  • What is the tip credit and how does it work? Employee wage requirements are established by the Fair Labor Standards Act. For the restaurant industry, it allows a business owner to apply a credit of up to $5.12 for the employee’s pay. The idea is that tips should make up this amount, which leaves the employer paying the difference in a wage, which is to be no less than $2.13. If the employee does not make up the difference in tips, the employer must do so to meet the hourly minimum wage standard. In most cases, the minimum wage is $7.25 an hour.
  • How are tips reported on taxes? Employee tips are taxable, and the employer is required to obtain the proper proportions for federal income tax, Social Security and Medicare taxes, federal unemployment tax, state and local income taxes, and state unemployment tax. These taxes need to be collected from the employee’s wages each pay period and are based on the tips they received in that time. The employee must also report these wages when they file their annual income taxes.
  • How does overtime differ for restaurant staff? For most hourly employees, overtime is a simple process. The majority of these workers will receive time and a half for every hour worked over 40 hours each week. That is one and a half times their typical hourly rate. But what do restaurant employees qualify for in terms of overtime pay? Tipped employees qualify for an overtime premium for any time worked in excess of 40 hours each workweek. Overtime premium is determined by dividing the minimum wage rate in half to arrive at the premium hourly wage for the additional time worked.
  • Can you deduct anything from their pay? The FLSA does allow employers to deduct certain costs of business from their employees’ wages, but only if the deduction would not cause the employee to earn less than the minimum wage standards after the deduction is made. This includes costs such as uniforms, nonpaying customers or broken objects. Technically, it is allowable to deduct these costs, but doing so may put you in violation of the FLSA if that causes an employee’s wage to be reduced below minimum wage.