Payroll for Restaurants: Tip Credits, Tip Pooling, Costs & the Best Payroll Services

Restaurant payroll combines hourly wages, tips and taxes. Employers pay tipped staff a cash wage (as low as $2.13 an hour under federal law where a tip credit is allowed), make sure wages plus tips reach minimum wage each week, run tip pools correctly, calculate overtime on the full minimum wage, withhold taxes on wages and reported tips, and file Form 941, W-2s and, for larger restaurants, Form 8027.

Under federal law, the minimum cash wage for tipped employees is $2.13 an hour, as long as tips bring total pay to at least $7.25 an hour. Many states require a higher tipped wage, and Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington require the full state minimum wage before tips.

A tip credit lets an employer count part of an employee’s tips toward the minimum wage. Under federal law the maximum tip credit is $5.12 an hour, the difference between $7.25 and the $2.13 cash wage. If tips fall short in a workweek, the employer must make up the difference.

Yes. Reported cash and card tips are wages subject to federal income tax withholding and Social Security and Medicare. Employees must report tips of $20 or more in a month to their employer by the 10th of the following month.

For tax years 2025 through 2028, tipped workers in qualifying occupations can deduct up to $25,000 of qualified tips on their federal income tax return, subject to income limits. Payroll still withholds income tax and Social Security and Medicare on tips, and employers must report qualified tips and tipped occupation codes on W-2s.

Managers and supervisors can never receive tips from a tip pool. Back-of-house staff such as cooks and dishwashers can share in a tip pool only if the employer pays everyone at least the full minimum wage and does not take a tip credit.

No. Mandatory service charges and automatic gratuities belong to the restaurant and are treated as regular wages when paid to staff. They cannot count toward a tip credit and generally do not qualify for the federal tip deduction.

Overtime for tipped employees is based on the full minimum wage, not the cash wage. Under federal rules with the maximum tip credit, the overtime cash wage is $5.76 an hour ($7.25 × 1.5 minus the $5.12 tip credit). Employees who work multiple roles use a weighted average regular rate.

Form 8027 is an annual IRS information return that large food or beverage establishments where tipping is customary file to report receipts and tips. If reported tips are less than 8% of gross receipts, the employer may need to allocate the difference among tipped employees.

The FICA tip credit lets restaurants claim a federal income tax credit for part of the employer Social Security and Medicare taxes paid on employee tips. It is claimed on Form 8846 and can save restaurants thousands of dollars a year.

Toast Payroll is a strong choice for restaurants on Toast POS, Square Payroll for cafés on Square, Gusto for independents that want flexibility, 7shifts for built-in tip pooling, and ADP or Restaurant365 for multi-location groups. The best fit depends on your POS and how you handle tips.

Restaurant payroll typically costs $35 to $69 per month plus $6 to $9 per employee. A restaurant with 25 employees usually pays about $185 to $294 per month depending on the provider and POS integration.