For a small business owner managing a bar, running payroll for bartenders and the rest of your staff comes with its own set of challenges. Employee wages are often calculated differently because of tips, and completing your payroll tax filing correctly can be complicated with the modified hourly wages under federal and state minimum wage requirements.
Still, it’s important to handle employee paychecks the right way so you can stay compliant and avoid getting into trouble with the IRS.
Let’s break down everything you need to know about improving the functionality of your bar payroll system and ensuring a smooth process every payday.
What you need to know when managing bar payroll
From employee contracts to setting the right pay period for your employees, here’s a list of what goes into managing your bar payroll.
Employee contracts
As soon as you hire new employees for your bar, you’ll need to file a new hire report with your state. You and your new team member will also submit a few forms as part of the onboarding process:
Form W-4
IRS Form W-4 helps determine how much federal income tax to withhold from your employee’s paycheck. They’ll need to complete this form before they show up for their first shift.
Form I-9
Your team member must also submit the I-9 before starting their first shift. The form verifies that the person is legally authorized to work in the United States. You don’t have to file this one with the government, but you’re required to retain it in your employment records.
Take a look at our article on how to fill out Form I-9s for more information.
Forms W-2 and W-3
Form W-2 reports how much you are withholding in payroll taxes from each team member. You’ll need to file this paperwork with the Social Security Administration annually by February 1, when you will also need to send copies to your team.
Form W-3 is submitted at the same time. This one reports the total amount of withheld payroll taxes from your entire team and the total amount of paid employee wages. You don’t need to send a copy of the W-3 to your employees.
Learn more about payroll taxes (including a rundown on FICA, Social Security, and more) in this article.
Compensation policies
Hourly vs. salary employees
Employees who are paid a salary receive the same amount each pay period based on an annual wage. However, your bar or restaurant employees likely get paid hourly wages, meaning you pay them based on the hours they work.
Full time vs. part-time employees
According to the Fair Labor Standards Act (FLSA), a full-time employee works 40 hours per week. This is the only law that stipulates regular workweek hours before overtime pay kicks in.
You can define what full-time work and part-time employment look like at your business. Many bar and restaurant owners use the typical 40-hour workweek to define a full-time employee, but others consider a full-time schedule to be 35 or even 30 hours in one week.
Your part-time employees are those that work less than your defined full-time hours. The vague legal definition means you have the flexibility to build your team however you see fit.
The main difference between part-time and full-time is that part-time team members aren’t qualified to receive certain employee benefits you may offer. So be sure to designate each employee clearly.
Luckily, Homebase scheduling works for both part-time and full-time employees. You can schedule as many employees as you need for the week and send the set schedule to your team immediately, giving them plenty of time to swap and trade shifts.
Tipped employees
Many bar employees earn tipped wages during their shifts as their primary source of income. You might even have a tip pooling system in place, which you can learn more about in this article.
A tipped employee is a team member who regularly earns more than $30 in tips on a monthly basis. The IRS requires that your employees record and report any tipped income of $20 or more per month.
Under the FLSA, you may count a percentage of the tips that a tipped employee earns toward the minimum wage requirement. This is called a tip credit. However, state rules vary — take a look at your state labor law guide to learn more.
Form of payment
You have a couple of options for how you pay your team members. Let’s look at the pros and cons of each.
Paper check
Some business owners choose to pay employees with paper checks because it allows for more privacy and control. Employees don’t have to share their banking information, giving them more control over who might be able to access their accounts. Employees are also able to control when they deposit their checks and where.
However, employees have an easier chance of losing or damaging paper checks, which can be dangerous for your business as it lists information like account and routing numbers. Paper checks also require more materials for printing, which means more money missing from your bottom line.
Direct deposit
Paying employees through direct deposit — or the electronic transfer of a payment directly to their bank account — is easy and gives your team the benefit of accessing their wages faster.
Direct deposit payments are also nice because there’s no chance of the payment getting lost on the way to the bank.
One con of direct deposit is that you’ll have to pay a setup fee to get started — they typically range from $50-$149. You may also be charged per employee for each deposit (anywhere from $1.50 to $1.90).
Additionally, your employee’s bank may have fees attached to the service — or they may not have a bank account at all. They would have to open one before getting paid, which can also cost money.
Payroll period
Bar owners should follow a weekly or bi-weekly payment period for a bar, especially if employees are paid per hour. There are pros and cons to both schedules.
Weekly
Paying employees on a weekly basis can build trust and improve morale because they’re getting paid more often and have easier access to wages. Additionally, hourly employees often have inconsistent shift schedules and a weekly pay period can make paying them less complicated.
Weekly payroll can also help organize your payroll system easily — you can simply choose one day of the week and stick to it every payroll period.
However, weekly checks can prove to be more expensive. Remember those direct deposit fees? Depending on your employee count, they can add up if you’re paying your team more often.
Bi-weekly
Paying employees bi-weekly, or twice a month, saves time since you’re only running payroll twice a month instead of four times. It also saves money because you won’t have to pay the processing fees as often.
Still, your employees are getting paid less frequently which could reduce morale. Luckily there’s a happy medium: Homebase offers the opportunity to give your team access to their wages as they earn them. Learn more here.
Bank accounts
It’s important for you to open two separate bank accounts when running a bar: an operating account and a payroll account.
Operating account
Your operating account functions as your main business account. Use this one for credit card transactions and cash deposits. It’s also used to pay your bills and invoices.
Payroll account
Your payroll account is used only for payroll purposes — and nothing else. Only move money from your operating account to your payroll account before each pay period, and never move money the other way around.
7 steps in a basic bar payroll process
Since the bar and restaurant payroll process can be tedious and complicated, it helps to have a set checklist that you can refer to each pay period so you don’t miss any steps.
1. Calculate the number of hours for each employee
First, calculate each employee’s work hours for the pay period. This is done easily if you use an automated time tracking tool like Homebase.
2. Collect tip reports
You need to collect tipped income reports from employees and credit card transactions from your POS and include all tipped wages for each pay period. In your calculation of wage payments, you must withhold income taxes and FICA taxes on tip income.
Include the tip income and withholding on all payroll tax reports, you’ll have to make deposits as required on tip withholding and FICA taxes. You’ll also need to maintain records of employee tips in case you’re audited.
3. Calculate gross wages for each employee
Gross wages for your bar payroll means the total amount of earnings for each employee before any taxes or deductions are withheld. To calculate it, simply multiply their hourly pay rate by the number of hours they worked for the pay period.
You’ll base all other calculations on gross pay before reaching the net pay — more on that later.
4. Factor in the taxes
First, calculate any voluntary pre-tax deductions that need to be taken out of the gross wages. Health insurance is pre tax, so is life insurance, commuter benefits, and retirement contributions.
Subtract these amounts (if any), and then calculate taxes due. The amount of tax withheld varies based on each employee’s withholding allowances from their Form W-4.
It’s time to calculate, withhold, and submit tax payments for you and your employees.
We laid out the need-to-knows in this article, but here’s the rundown of how much you need to take out of gross wages based on the type of payroll tax:
Employer-paid taxes
- FICA: Social security is 6.2%, and Medicare is 1.45%
- FUTA: Typically 0.6% on the first $7,000 of wages paid in the year
- SUI: Rate is assigned by the state
Employee-paid taxes
- Income tax: Federal and state income tax (where applicable) vary based on earnings and withholding allowances
- FICA: Social security is 6.2%, and Medicare is 1.45%
5. Tally the net pay
Your employee’s net pay is the money left over after all mandatory deductions are withheld. These include pre-tax deductions, local, state, and federal taxes, and tip credits.
Once you’ve deducted all the necessary funds, the rest belongs to the employee and is what they receive on payday.
6. Distribute payroll
Finally, it’s time to cut and distribute checks or deposit funds to your employees. Remember to first set up a plan for how you want to pay your team to make this step as smooth as possible.
7. Safely store the payroll records
You’re required under the FLSA to store all payroll records for at least three years. Additionally, the FLSA requires you to maintain records of how you calculated wages for two years.
According to the IRS, records of employment taxes must be maintained for at least four years after filing the fourth quarter for the year. These include your employees’ Form W-4s and dates of employment.
How to level up your bar payroll
Following these tips will help ensure a smooth process and take away unwanted headaches come payday.
Check local minimum wage policies
The federal minimum wage is $7.25 for non-tipped employees and $2.13 for tipped employees with a tip credit, but these numbers vary widely based on the state and city you live in. Take a look at your state labor law guide to double-check that you’re following the right rules.
Don’t go overboard with overtime
Too much overtime can hurt your bottom line, so use it wisely. Homebase helps you make smarter scheduling decisions by alerting you when employees are about to reach overtime, allowing you to move a few shifts around and build schedules in line with your labor cost targets.
Set up direct deposit
Direct deposit is the easiest way to pay your team and prevents you from having to print checks every pay period. Get started by collecting consent and banking information from each employee and submitting it to your direct deposit provider. This way your team can rest easy knowing their funds will be delivered to their bank account seamlessly each pay period.
Document everything
Again, all payroll records must be properly maintained and stored to avoid any unwanted run-ins with the government. Make sure you have a solid system in place to do so.
Automate payroll management
The best way to ensure a smooth process every pay period is to automate it! Use a payroll software like Homebase to reduce errors and get everything done on time.
How Homebase simplifies bar payroll management
Homebase makes payroll management for bar owners easy. Here’s how.
Manage employee schedules
With Homebase scheduling, you can avoid overtime with handy alerts, build schedules in line with your sales forecasts and labor targets, and more.
Calculate work hours automatically
Tallying work hours? Piece of cake. The Homebase time clock does it for you by instantly converting your timesheets into hours and wages in payroll. It’ll also help you reduce time theft, and set labor to sales targets so you can protect your bottom line while simultaneously breezing through step one of the payroll process.
Stay compliant
Homebase takes away the headache of sweating complicated compliance tasks. We’ll help you set up breaks and overtime for your state, and even calculate, pay, and file your payroll taxes for you.
Additionally, we’ll automatically submit your new hire reporting and file and distribute necessary paperwork and also store your records to help you stay compliant with the FLSA.
Bar payroll FAQs
What percentage should payroll be in a bar?
While every bar is unique and comes with its own labor percentage, a good rule of thumb is that labor costs typically range from a low of 25% to a high of 40% of sales.
What is the difference between paycheck tips and cash tips?
Cash tips are given to an employee directly by your customers instead of through a paycheck. Paycheck tips are charged tips that your customers add to credit cards that you then include in your employee’s paycheck.
What happens if you don't report cash tips?
If your employee doesn’t report tips to you, they could be subject to a penalty of one-half of the FICA taxes owed on those unreported tips. However, the penalty could be avoided if your employee shows “reasonable cause” for not reporting them. Learn more about the IRS penalties here.
Remember: This is not legal advice. If you have questions about your particular situation, please consult a lawyer, CPA, or other appropriate professional advisor or agency.
