Restaurant payroll runs on different rules than most small business payroll. Tipped employees can legally earn $2.13 an hour in direct wages. Tips then have to bring them up to the federal minimum of $7.25. Getting the tip credit, tip pooling, or tax reporting wrong is a common mistake. It’s one of the top reasons restaurants end up owing back wages. Tip credit eligibility rules changed significantly at the end of 2024. A federal tax change in 2025 added a new wrinkle for 2026. I’ve set up payroll for restaurants on both ends of that transition. Most of the confusion traces back to outdated guidance that’s still circulating online.
How Restaurant Payroll Differs From Standard Payroll
Restaurant payroll has to account for tip income, the tip credit against minimum wage, and tip pooling rules. It also has to track multiple pay rates for staff who move between tipped and non-tipped roles. None of that exists in a typical hourly payroll calculation. That’s why generic payroll software often misses restaurant-specific compliance steps.
Multiple Pay Rates Are the Norm, Not the Exception
A server who bartends one shift and waits tables the next earns two different rates. A cook who picks up a server shift earns a third. Restaurant payroll needs to track which rate applies to which hours worked. Paying the wrong rate for the wrong shift is a common error. It’s one of the things that often surfaces in a Department of Labor audit.
The Federal Tip Credit, Explained
The federal tip credit lets employers pay tipped employees a direct cash wage of $2.13 an hour. Tips make up the difference, up to the $7.25 federal minimum wage. The maximum tip credit an employer can claim is $5.12 an hour. Tips plus the cash wage have to reach minimum wage in any workweek. If they don’t, the employer has to make up the shortfall.
Who Qualifies as a Tipped Employee
Under the Fair Labor Standards Act, a tipped employee is someone who regularly receives tips. The threshold is more than $30 a month in tips for their role. Servers, bartenders, bussers, and similar front-of-house positions typically qualify. Back-of-house staff like cooks and dishwashers generally don’t, unless they’re part of a valid tip pool.
States That Don’t Allow a Tip Credit
Several states require employers to pay tipped employees the full state minimum wage before tips. They allow no tip credit at all. California, Oregon, Washington, Nevada, Montana, Alaska, and Minnesota are commonly cited examples. Washington, D.C. began phasing out its tip credit in 2023, under a ballot initiative. That initiative is scheduled to eliminate the tip credit by 2027. State minimum wage and tip credit rules change often. It’s worth checking the Department of Labor’s state-by-state tipped wage table directly before setting up payroll in a new state.
The 80/20 Rule Is Dead. Here’s What Replaced It
The 80/20/30 rule capped how much non-tipped work a tipped employee could do. The limit was no more than 20% of their time, or 30 continuous minutes, on supporting tasks like these. A federal appeals court vacated that rule in August 2024. The Department of Labor formally withdrew it that December. If you’ve read advice referencing the 20% rule, it’s outdated.
The Dual Jobs Rule Now Governs Tip Credit Eligibility
What replaced it is the older “dual jobs” rule. A tipped employee can spend time on tasks that support their tipped role, like setting tables or rolling silverware. There’s no time limit, as long as those tasks relate to the tipped occupation. The tip credit only becomes unavailable when an employee works a genuinely separate job. A server who also works scheduled shifts as a line cook is a good example. The employer has to pay for the second job at the full minimum wage, with no tip credit.
Tip Pooling Rules for Restaurants
Restaurants can require tip pooling among employees who customarily receive tips. Since 2018, they can also include non-tipped staff, like cooks and dishwashers, in that pool. This only works if the employer pays full minimum wage and skips the tip credit. Managers and supervisors can never keep any portion of a tip pool, even if they perform tipped-eligible work themselves.
Service Charges Are Not Tips
A mandatory service charge, like an automatic 18% gratuity on parties of six or more, is legally a service charge. It’s not a tip. The IRS treats it as regular wages, fully subject to payroll tax. It doesn’t qualify for the FICA tip credit or the new federal tips deduction. That’s true regardless of whether the restaurant later distributes it to staff.
Form 8027: Who Has to File It
Form 8027 applies to what the IRS calls “large food or beverage establishments.” These are locations where tipping is customary, and the business serves food or drinks for on-premises consumption. The business also has to employ more than 10 employees on a typical business day. That has to be true in the prior calendar year. Fast-food counters, food trucks, catering operations, and delivery-only businesses generally don’t meet this test.
Filing Deadlines and the 8% Allocation Rule
If reported tips come in under 8% of food and beverage gross receipts, the IRS requires action. The employer has to allocate the shortfall to directly tipped employees and report it on their W-2. Form 8027 is due by the last day of February for paper filing, or March 31 for electronic filing. It covers the prior calendar year.
The FICA Tip Credit (Section 45B)
The FICA tip credit lets restaurants recover part of the employer’s share of Social Security and Medicare tax. That combined tax rate is 7.65%. It applies to tips that exceed what’s needed to bring an employee’s direct wages up to $5.15 an hour. Congress froze that $5.15 figure in 2007, specifically so credit calculations wouldn’t shrink as the federal minimum wage rose. This is a different number than the current $7.25 federal minimum. It’s a common point of confusion, even among experienced bookkeepers.
Note that the IRS’s own informal web page on this credit currently shows $7.25 instead of $5.15. That’s a documented inconsistency with the statute. It’s not a sign that the $5.15 figure here is outdated.
A CPA generally calculates and claims this credit on the business’s tax return, using Form 8846. That happens at filing time, not through payroll software. Payroll software can track tip income and keep it separated from wages. That way, your tax preparer has accurate numbers to work from.
What Changed for 2026: The New Tips Deduction
For tax years 2025 through 2028, employees and self-employed workers can deduct qualified cash tips. The cap is $25,000, claimed on their personal income tax return. This is a federal income tax deduction, not a payroll tax exemption. Employers still owe their full FICA share on tips. The Section 45B credit stays the same. Mandatory service charges don’t qualify since they’re wages, not tips. Most states haven’t conformed to this change as of 2026. Tip income that’s deductible federally may still be fully taxable at the state level. That means employers need to handle state withholding on tips separately from the federal side.
How to Calculate Restaurant Payroll: A Worked Example
This is an illustrative example for a constructed scenario, not a real customer’s payroll. Say a server worked 30 hours in a week, earned the $2.13 tipped cash wage, and reported $310 in tips.
| Item | Amount |
| Hours worked | 30 |
| Direct cash wage ($2.13/hr) | $63.90 |
| Tips reported | $310.00 |
| Total compensation | $373.90 |
| Required minimum ($7.25 × 30) | $217.50 |
Since $373.90 is well above the $217.50 minimum wage floor, the tip credit is valid for that week. If tips had come in under $153.60 instead, the employer would owe the difference between actual pay and the $217.50 minimum. That $153.60 figure is the exact amount of the maximum $5.12-per-hour tip credit across 30 hours. The tip credit only works when tips genuinely close the gap.
Why FRIDAY Handles Restaurant Payroll Differently
Most restaurant payroll mistakes that lead to DOL findings share one cause: manual tracking. Owners track multiple pay rates, tip credit eligibility, and tip pooling by hand, across staff that turns over constantly. FRIDAY’s time tracking syncs hours directly into payroll, with real-time visibility into who worked when. That matters when staff move between roles during a shift.
If you’re currently reconciling tips by hand against a payroll compliance checklist every pay period, that’s worth automating. The same goes if you’re not sure your current setup reflects the dual jobs rule that replaced the 80/20 rule. It’s worth a closer look at how FRIDAY’s payroll software handles tipped staff specifically. That includes direct deposit and employer registration by state for restaurants expanding to a new location.
Frequently Asked Questions
How do you do payroll for a restaurant?
Restaurant payroll requires tracking hours by role and pay rate, and calculating tip credit eligibility each week. It also means reporting tips for tax withholding. And filing Form 8027, if the business meets the large food or beverage establishment threshold. Most restaurants handle this with payroll software that integrates with their POS system to pull tip data automatically.
What should payroll look like for a restaurant?
Payroll should separate tipped and non-tipped hours, and apply the correct cash wage and tip credit for each role. It should also reconcile reported tips against POS data before each pay run. Restaurants with multiple pay rates per employee need software that tracks which rate applies to which shift.
What is the 30/30/30 rule for restaurants?
The 30/30/30 rule is a budgeting benchmark, not a labor law. It suggests restaurants aim for roughly 30% of revenue on food costs, 30% on labor, and 30% on overhead. That leaves about 10% for profit. It’s a financial planning guideline for monitoring labor cost as a percentage of revenue, unrelated to wage and hour compliance.
What are the 4 types of payroll systems?
The four common types are in-house manual payroll, in-house payroll software, and outsourced full-service payroll. The fourth is a professional employer organization, or PEO, that co-employs staff. Most small restaurants use either in-house payroll software or an outsourced provider rather than managing tip credit calculations by hand.
Are credit card tips treated differently from cash tips for payroll?
No, both cash and credit card tips count as reportable tip income for minimum wage and tax purposes. Employers can deduct the credit card processing fee proportional to the tip from the employee’s payout. They can’t reduce the tip below the minimum wage requirements by doing this.
Do service charges count toward the tip credit?
No. The IRS treats mandatory service charges as regular wages, not tips. They’re fully taxable and don’t count toward the tip credit calculation. They also don’t qualify for the FICA tip credit or the new federal tips deduction.
Disclaimer: This article is for general informational purposes only and does not constitute legal, tax, or financial advice. Tip credit, tip pooling, and tax rules vary by state and change over time; consult a licensed employment attorney or tax professional for guidance specific to your restaurant. Federal figures and regulatory status reflect Department of Labor and IRS guidance current as of June 22, 2026.
Pincus Schiff is a payroll software specialist at Friday App, where he helps businesses simplify payroll, stay compliant, and automate their workflows. He writes about payroll best practices, compliance, and the latest in workforce technology.
