7 Common Restaurant Payroll Mistakes And How To Avoid Them

By Starza Thompson|Mar 28, 2024|3:46 pm CDT

Your restaurant might boast exciting menus, beautiful dining areas, and a great reputation—but tripping up on payroll can bring it all crashing down. In a restaurant, payroll mistakes can lead to higher turnover, hefty fines, and ultimately a damaged reputation. But don’t worry. You don’t have to deal with this alone.

Here, we’ll highlight some common restaurant payroll mistakes that you might be making without even realizing it. We’ll also provide some tips and tricks to avoid these errors and keep your payroll process running smoothly.

Key Takeaways

  • Common restaurant payroll mistakes include incorrectly handling pooled tips, misclassifying employees, forgetting to account for overtime, violating minimum wage laws, failing to maintain proper records, and missing tax deadlines.
  • Consequences of payroll mistakes might include hefty fines from the IRS or the Department of Labor, reduced staff morale, tarnished business reputation, higher turnover rates, and strained cash flow.
  • Payroll errors can potentially violate rules outlined in the Fair Labor Standards Act (FLSA) regarding minimum wage and overtime pay. These rules are different for tipped and untipped employees, so restaurant employers need to be especially informed and cautious.
  • Using an efficient payroll system or partnering with a Professional Employer Organization (PEO) can help employers minimize payroll errors, maintain necessary records, and handle tax-related issues, even while labor laws develop and change.
  • Automating the payroll process through a comprehensive solution like Fourth has a myriad of benefits. These tools can prevent human error, ensure correct overtime pay and tip pooling, and help resolve any payroll discrepancies efficiently.
  • Transitioning to an automated payroll system, while potentially challenging, offers significant benefits for smooth operations, legal compliance, and the restaurant’s bottom line.

Consequences of payroll mistakes

Payroll mistakes are more than mere clerical errors. They can have serious repercussions for your employees and the health of your business.

Need an example of what happens when you make a series of payroll mistakes? Just look to Wisconsin, where a restaurant owner was recently fined $2,373 for child labor violations and was required to pay over $272,000 in back wages. No matter the employer’s intentions, payroll errors are expensive, destructive for workplace culture, and can lead to costly litigation.

In a complicated industry like food service, it’s entirely possible to underpay your staff without realizing it. But misunderstanding labor laws doesn’t exempt you from resulting penalties. In fact, not understanding payroll laws is often the first step toward violating them. Failing to follow labor laws or to maintain proper employee records can make you liable for hefty fines.

The restaurant industry operates on slim margins, and unexpected fines or legal defense costs can strain your cash flow and threaten your business’s survival. Staying on top of payroll is your best defense against potentially disastrous expenses down the line.

The financial and legal repercussions are bad enough, but payroll errors can also impact staff morale and restaurant management. Employees who are paid incorrectly or late are likely to feel undervalued or exploited. This can lead to reduced productivity, higher turnover rates, and a tarnished reputation for your restaurant business.

Every small business owner should be aware of these potential consequences. By giving due attention to payroll processing, you can alleviate risks to both your restaurant’s finances and its reputation.

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The ROI of using a PEO in cost savings alone is 27.2%. See how leveraging HR & payroll partnerships can support your restaurant’s growth and streamline operations. 

Common payroll mistakes to avoid

Managing restaurant payroll can be fraught with pitfalls—and often, these pitfalls can lead to costly mistakes. The easiest way to avoid most payroll problems is by leveraging an appropriate payroll system or PEO partner.

These tools can automate and streamline your payroll processes. That won’t just save you time. It will also save you money by helping you avoid the potential fines that come with making critical mistakes.

Let’s take a closer look at some of the most commonly reported restaurant payroll mistakes.

Incorrectly Handling Pooled Tips

Handling tip pooling incorrectly is one of the most common mistakes in the restaurant industry. Under the Fair Labor Standards Act (FLSA), tips are considered the sole property of the tipped employee. As a general rule, mandatory tip pooling is acceptable among workers who customarily and regularly receive tips. Including other workers (such as cooks and dishwashers) in a tip pool can lead to complications—and may be illegal.

Let’s return to the story of the Wisconsin restaurant that was charged $270,000 in back pay. This case is an excellent example of how invalid tip pools can cascade into even more problems.

In this case, the employer set up a tip pool that included kitchen staff. Although employers may be able to include traditionally untipped workers in tip pools, they cannot do this while simultaneously claiming tip credits. After setting up this invalid tip pool, the restaurant continued to pay kitchen staff overtime based on their normal hourly pay, not including tips. This was a huge mistake. Yes, it was illegal to include those workers in the tip pool in the first place. But since cooks and dishwashers were receiving tips, their overtime pay needed to be one-and-a-half times their total hourly earnings. In other words, their “base pay,” used to calculate overtime, should have included these workers’tips.

The restaurant wound up violating multiple payroll rules at once. They shouldn’t have included kitchen staff in the tip pool at all, but once they did, they needed to use the total tipped income to calculate overtime. All of these problems derived from one poorly managed tip pool.

As this story illustrates, it’s all too easy to violate the Fair Labor Standards Act (FLSA) by using a tip pool incorrectly. If tips from a tip pool fail to make up the difference between a worker’s base pay and the local minimum wage, for instance, employers cannot claim a tip credit. In this case, they must pay workers at least minimum wage. And if you calculate overtime pay incorrectly based on inaccurate assumptions about tips, you may face both back pay and fines from the IRS or the Department of Labor.

Incorrectly Classifying Employees

Another mistake many restaurant owners make involves classifying their employees incorrectly. Whether deliberate or due to human error, misclassification—such as handling a worker as an independent contractor when they should be an employee—can lead to severe problems. Employers will be held responsible for employment taxes and may be penalized for violating employee protections.

To stay in compliance with the IRS, employers must correctly classify their workers as employees or contractors, and, when relevant, as managers or assistant managers. This is important because managers and assistant managers may be exempt from overtime pay requirements. To be exempt, these workers must manage at least two full-time workers, have hiring and firing power, and earn at least $684 per week. If these requirements are not satisfied, restaurant employers will still need to follow conventional overtime rules.

Forgetting to Account for Overtime

In the restaurant industry, calculating overtime is a common challenge. It’s crucial to keep accurate timesheets and ensure you’re paying at least one-and-a-half times the hourly rate for overtime. Overlooking this aspect of payroll processing could open you up to back pay and financial penalties.

In most cases, overtime pay equals one-and-a-half times the regular pay for an employee. But this can be confusing if you employ tipped workers who make below minimum wage. Fortunately, there is a straightforward way to calculate overtime for tipped workers.

First, calculate their “base rate” by adding their wages to the tip credit you claim for them (plus any additional pay they may have earned). Then, simply multiple this rate by 1.5. Subtract the tip credit you take. The result is the rate they should be earning for any work beyond 40 hours a week.

Let’s say you pay a server $2.13 an hour and claim a tip credit of $5.12. Their base rate is $7.25. Their hourly overtime rate can be found with this calculation: 7.25 x 1.5 – 5.12. The result is $5.75. That is how much you should be paying this worker for every hour of tipped overtime work.

Minimum Wage Violations

Minimum wage adherence is another area where restaurant owners often falter. You must understand the federal, state, and local laws that are in effect where your restaurant operates.

For restaurant employers, the biggest complication regarding minimum wage is understanding how it applies to tipped employees. The federal minimum wage is $7.25, but many states have higher minimum wages, and varying wage requirements for tipped workers. To claim a tip credit (i.e., to pay tipped workers below the regular minimum wage), you must ensure that they are doing work that will result in tips that match or exceed minimum wage. If their tips don’t boost their hourly rate to at least minimum wage, you must increase their wages.

Minimum wage laws are also different for workers under the age of 20. In the first 90 days of employment, teenage workers must be paid a minimum of $4.25 an hour. As soon as this 90-day period is over (or as soon as the worker turns 20, depending on what happens first), their minimum wage rises to the standard rate. Note, also, that this refers to 90 calendar days, not the first 90 days of scheduled work.

Incorrect Tax Withholding

Accurately withholding and submitting payroll taxes for income, Social Security, and Medicare is another landmine for restaurant owners. Over or underpaying these can quickly land you in hot water with the IRS.

To stay compliant, you must manage tax withholding properly depending on your employees’ statuses and earnings. The easiest way to manage this is by working with a PEO partner that manages tax administration on your behalf.

Failure to Maintain Proper Records

Good record-keeping is essential in running payroll. The IRS recommends keeping paperwork related to expenses, assets, purchases, and, of course, taxes.

Maintain accurate time and pay records for each employee. Not only will it help you stay compliant—it will also assist with labor forecasting and predicting upcoming expenses. This paper trail will also be a lifesaver if you ever find yourself facing an audit.

Missing Tax Deadlines

Regularly missing tax deadlines can lead to costly fines and penalties. While there are some cases in which the penalties may be abated, this isn’t something to bank on. In most cases, a missing tax deadline will come with a price.

Be sure to carefully track tax deadlines and be prepared to meet them. If you need additional support, a PEO will be able to take over these duties.

How to avoid payroll mistakes

As a restaurant employer, you simply can’t afford to make payroll mistakes. Not only do these mishaps hurt your employees and your bottom line, but they could lead you straight to legal issues involving the IRS and the Department of Labor. It’s crucial to know how to keep your restaurant payroll efficient and compliant.

Use a Solution like Fourth

If you’re concerned about payroll errors, it’s time to consider automating the entire process. One way to do that is by using a comprehensive solution like Fourth.

Fourth is an all-in-one payroll system that streamlines your payroll processing to prevent human error, reduce chances of underpaying or overpaying, and ensure correct handling of overtime pay and tip pooling. Fourth also offers real-time data, which is invaluable for restaurant employers running payroll. Whether an employee fails to clock in correctly or there’s an issue with timesheets, Fourth keeps you on top of issues as they develop.

Fourth also incorporates FLSA requirements into its program, ensuring you’re always adhering to the minimum wage laws, including the unique ones that apply to tipped employees. With Fourth, you easily handle payroll taxes, resolve payroll disputes, and access historical pay data to correct errors promptly and accurately. With a streamlined payroll system, you can simplify HR concerns and spend less of your day on complex legal tasks.

Managing Your Restaurant With Automated Payroll

In a restaurant, payroll mistakes can invite unpleasant legal spats with the IRS and the Department of Labor—which most small businesses cannot afford.

Deploying an automated system like Fourth can shield your business from payroll errors. This all-in-one solution incorporates complex legal requirements, mitigates human error, and ensures optimal compliance with payroll laws.

Want to learn more about how you can gain control of payroll with Fourth? Contact us today.

Let Fourth manage your payroll and employee benefits so you can focus on your business, not the HR business.


What are the consequences of payroll mistakes?

Payroll errors can cost your restaurant in a number of ways. You may be faced with fines, expensive lawsuits, and mandated back pay. Additionally, payroll mistakes cost your business in terms of morale and reputation. Employees are less likely to stick around and do good work in a business where they have been paid incorrectly. This will already damage your reputation with customers—and if your errors are severe, you may even make it into the news. That’s not the kind of publicity any small business owner wants.

What are common payroll mistakes?

Some of the more common restaurant payroll mistakes include miscalculating minimum wage for tipped employees, incorrectly paying overtime, relying on invalid tip pools, and failing to maintain proper records. Any of these mistakes could cost you, so it’s vital to understand all relevant labor laws—or partner with a PEO like Fourth that can handle these issues for you.

How can payroll mistakes be avoided?

Avoiding payroll pitfalls is crucial for your restaurant’s success. Underpaying or misclassifying employees, miscalculating overtime, or mishandling tip pooling can land you in hot water with the IRS and Department of Labor. Consider using an automated HR system like Fourth to streamline payroll, ensure compliance, and efficiently resolve discrepancies.