What Restaurants Owners Need To Know About Payroll

Payroll requirements for restaurants with tipped employees can be complex. Understanding the specific regulations that apply to tipped employees is crucial to avoid compliance issues and ensure that employees receive proper compensation. In this blog post, we will discuss the specific payroll requirements that restaurants have around tipped employees.

Tip Credit and Minimum Wage

The Fair Labor Standards Act (FLSA) allows employers to take a tip credit against the minimum wage obligation for tipped employees. The current federal minimum wage is $7.25 per hour, but tipped employees can be paid as little as $2.13 per hour, as long as the combination of their tips and hourly wage equals the federal minimum wage. Some states have higher minimum wage rates for tipped employees.

Tip Pooling

Tip pooling occurs when tipped employees contribute a portion of their tips to a pool, which is then distributed among a group of employees. Employers can require tip pooling, but it must meet certain requirements under the FLSA. Tip pooling can only include employees who regularly receive tips, such as servers, bartenders, and bussers. Employers cannot include non-tipped employees, such as cooks and dishwashers, in the tip pool.

Service Charges

Some restaurants include service charges on customers’ bills, which are then distributed to the employees who provided the service. However, service charges are not considered tips and cannot be counted toward the tip credit. If an employer distributes service charges to employees, it must be clearly stated to the customer that the service charge is not a tip and is being distributed to the employees.

Record Keeping

Restaurants must keep accurate records of all tips received by employees, including cash tips and credit card tips. Employers must also keep a record of the amount of tips each employee reported to the employer each pay period. This information is used to calculate the tip credit and to ensure that employees are receiving proper compensation.

Reporting Tips

Employees must report their tips to their employer, who must then report the tips to the IRS. Employees are required to report all tips received, even if they do not receive a paycheck for that pay period. Employers must also report the tips on Form 941, which is used to report federal payroll taxes.


In conclusion, payroll requirements for restaurants with tipped employees can be complex. Understanding the regulations around tip credit, tip pooling, service charges, record keeping, and reporting tips is crucial to ensure compliance and avoid penalties. It is important for restaurants to have a payroll system that can accurately calculate the tip credit and track employee tips to ensure proper compensation. By following these regulations, restaurants can provide fair compensation to their employees and avoid compliance issues.