The ADL Hospitality Group had the opportunity to view a study that forecasted specific threats to the restaurant industry. The findings concluded that the number one threat to a restaurant's survival was increased competition. The second threat was the inability to hire and retain talented employees.

Managing payroll and payroll records can be a difficult area for operators. Issues like staffing, overtime and budgeting all have to be taken into consideration. If sales are slow, payroll will be high as a percentage of sales. During the slow months, some operators try to cut payroll while keeping a qualified staff. When business picks up again, the operators shift back to full staffing. A big mistake is to think the business can carry the staff during the slow months. However, unless an operator is willing to lose money, the restaurant owner will need to cut staff when business is slow. Payroll should run between 28% to 41% of sales, including taxes and benefits. Higher percentages hurt profitability.

The next page contains a breakdown of wages for key positions in dollars and percentage of sales. Since most of the data is based on a wide range of restaurants, the wage rates differ. For example, a restaurant with $2.0 million in sales pays a different wage for a manager than a restaurant with $7.0 million in sales. Use the sales percentages as a guide when managing the business. However, pay careful attention to the dollars. The percentages are important, but it is the dollars that count in the end.

For payroll record keeping, use a payroll service, such as ADP, Paychex or Payroll Computing Services. There are specific rules for restaurant employees and these rules are always changing. Trying to do the payroll in-house will be more costly in the long run. An operator should set up a separate bank account just for payroll and make weekly transfers once a week to cover the payroll and taxes. The operator should let the payroll service impound the taxes for the restaurant to avoid potential penalties for not paying taxes timely.

Internal Revenue Service and State Department of Labor monitor the following:

  • Weekly payroll deposits to cover withholding taxes and FICA. FICA is 7.65% of gross pay and is a combination of Social Security (which taxes at 6.2% of the gross pay) and Medicare (which taxes at 1.45% of gross pay).
  • Federal unemployment taxes on a quarterly basis. Paid at a rate of 0.8% of the first $7,000 each person earns annually.
  • Tips declared by the wait staff in excess of the charge tips reported. An annual form 8027 must be filed.

Hourly Employees:

            Line and Prep Cooks                         $8.00 - $15.00 per hour

            Wait Staff                                          $2.63 ‚ and up per hour

            Bartenders                                         $2.63 ‚ and up per hour

            Hostesses                                          $8.00 - $14.00 per hour

            Runners/Bus Boys                             $2.63 ‚ and up per hour

Salaried Employees:

            General Managers                                $40,000 - $100,000

            Floor Managers                                    $25,000 - $ 45,000

            Executive Chef                                     $45,000 - $125,000

            Sous Chefs                                          $25,000 - $ 45,000 

State Department of Labor:

  • They expect all restaurants to have workers compensation and disability insurance policies. They can be obtained through an insurance agent. Disability costs around $.06 per day, per person and workers compensation cost around 4% of total payroll. Some states require a business to have it by law.
  • State Unemployment is another quarterly tax that a restaurant must bear. A restaurant is assigned a rating based on the balance in their pool with the state. For example, in New York, the rate ranges from 2.0% to 7.1% on the first $8,500 each employee earns. So, if a restaurant has 10 employees and has an experience rating of 5.0%, the annual cost for New York State unemployment would be $4,250 annually ($8,500 x .05 x 10).

The experience rating changes are based on how much an operator pays into the fund, as well as the amount of employee turnover. Managing unemployment claims can be a full time job in itself. However, the difference between having a 2.0% rate and a 7.1% rate is $357 per employee. An operator can make voluntary contributions to the fund to lower the rating. A good payroll service or accountant can monitor this process.

Bookkeeper Notes

Most employees in this business are paid hourly. The restaurant should have a time clock or use the POS system to log-in people. At the end of the week, calculate gross wages by adding up the time per employee and multiplying it by their hourly rate (time and half for hours worked in excess of 40 hours). For example, a line cook making $10.00 an hour working 50 hours a week earns $550.00 ($10 x 40 Hours + $15 x 10 OT Hours = $550.00). From the $550.00, you will need to withhold the following taxes:

Payroll Breakdown Sample:

                       Gross Pay                        $  550.00

                        Social Security                     34.10

                        Medicare                               7.90                             

                        Federal Withholding Tax        98.00

                        State Withholding Tax           45.00

                        City Withholding Tax               5.00


                        Net Pay                           $  360.00

The restaurant will have to remit the withholding taxes to the IRS and State Tax Departments timely.  From the above example, the IRS would receive:         

                                                  IRS                                STATE & CITY                                                           

Federal Withholding Tax      $   98.00                     State Withholding Tax         $  45.00

Employee Social Security          34.10                     City Withholding Tax                5.00

Employer Social Security           34.10

Employee Medicare                    7.90                                                                       

Employer Medicare                     7.90                                                               _____


Total Due                             $ 182.00                                                           $  50.00


Total Liability:               Federal Taxes               $ 182.00

                                    State Taxes                   50.00

                                    Total Taxes Due         $ 232.00         


                                    Net Pay                    $ 360.00


Total cost to the restaurant                             $ 592.00


Unemployment taxes and contributions to workers compensation insurance will also be added to the cost of the employee. Add another 3% to 5% to the gross pay.     

Other Things To Know:

  • In some states, tipped employees can be paid below minimum wage. It varies by state. In New York, the rate is currently $2.90 an hour. In San Francisco and Boston, the wage rates are $5.75 and $2.63 an hour, respectively.
  • Shift pay is illegal. Companies must pay hourly.
  • Overtime starts at 40 hours a week and is paid at time and a half. (For tipped employees, it's the minimum wage x 1.5 - the tip credit).
  • Anyone with the power to hire and fire cannot participate in the tip pool.
  • Be Careful: Unemployment rules in some states require staff meals to be included in the calculation of unemployment taxes.

Workers Compensation

All operators should become members of their states' restaurant association (primarily because associations have a safety group for workers compensation). Safety groups pool restaurants together for better rates. At the end of the year, the fund pays a dividend, which in some cases, exceeds 50% of the premium. No other safety group can boast about such a performance. If your insurance agent does not recommend a safety group, be sure your carrier is charging less than the group.

Classifying Payroll by Departments

Payroll should be broken down by managers, executive chef, kitchen staff, servers, bar and office staff. Some restaurants go into more detail and breakdown payroll by waiters, busboys, line cooks, dishwashers, etc. If you are going to use this information and make decisions from this format, definitely use it. If not, use the KISS principle. Keep It So Simple!

Bookkeeper Notes

If an operator uses payroll journals by department, the payroll will be easier to manage. Since the business already has a separate account for payroll, the bookkeeper can book the gross dollars per week and not worry about a payroll gross up. A typical entry is as follows:

 Debit      Credit
- Managers   
- Executive Chef  
- Kitchen 
- Servers 
- Payroll taxes Social Security  
- Payroll taxes State Unemployment Tax
- Payroll taxes Federal Unemployment     Tax  
- Cash Payroll (net payroll) 
- Federal Withholding and Social Security Taxes Payable  
- State Withholding and CWT Payable  
- State Unemployment Tax and Federal Unemployment Tax Payable     
At the same time, record the tax impounding as follows:
- Federal Withholding and Social Security Taxes Payable
- State Withholding and CWT Payable   
- State Unemployment Tax and Fed Unemploy. Tax Payable