Using a home address to register an LLC or incorporate a business is something many entrepreneurs think about doing. That’s understandable because many new businesses start their journey in the entrepreneur’s home or garage, which allows the business to avoid office rent, unnecessary utilities, and long commutes. This not only allows more time to focus on growth, but it can also help a company turn a profit faster as it ramps up.

Does this lack of address impact the business negatively? Do you need a physical address for your business? Is it legal to use your home address for business activities? And if you use a home address, will it cause any issues for you as a business owner?

You do need a physical address to register a business, but many sole proprietors and various types of professional services businesses don’t have a separate business location and they don’t need one. When they decide to incorporate or form an LLC, they see using a home business address as a simple solution. Technically, it is legal to use your home address for your LLC, Sole Proprietorship, Limited Liability Company, C Corporation, or other business entity.

Let’s explore these questions to give you an idea of what you should think about when weighing the pros and cons of using your home address as your business address.  Keep in mind that each state may have nuances to its rules and process requirements. And, what I am about to share here is not professional legal or accounting advice, so I encourage you to talk with your attorney and accountant or tax advisor for guidance in making decisions for your business.

Important Factors to Consider

Now that we know it is legal to use your home address for business registration, let’s review things to consider.

Registered Agent Designation

Using a home address as a business address can create privacy and security concerns for business owners, but a third-party registered agent can help alleviate this concern. When a business is registered as an LLC or a C Corporation, it’s required to designate a registered agent. A registered agent is an authorized party (within the business’s state of registration) that will receive service of process notices and government correspondence on behalf of the company.

If a company appoints a business owner as its registered agent, that person’s home address information becomes publicly available in state records. In most states, an LLC or corporation’s registered agent history also becomes part of the public record. So, it’s worthwhile for entrepreneurs to consider appointing a third-party registered agent from the start if they want to avoid putting their home address out there for all to see. Having a third-party (like CorpNet) serve as a registered agent can also prevent embarrassment to a business owner’s family if the company is sued. If the home address is the registered agent’s address, the summons will be served at the entrepreneur’s house. And no one likes to give neighbors a reason to speculate and gossip!

Another way using a home address can cause privacy issues is when it’s used on a business’s website and in other marketing materials. With the address out there online, it’s available to everyone throughout the world. It might result in unwanted junk mail and unexpected home visits (such as from salespeople, unhappy customers, and individuals with ill intentions).

The Corporate Veil

Companies registered as an LLC or a C Corporation must make sure they keep the owner’s personal finances separate from those of the business. That corporate veil protects a business owner from the legal and financial liabilities of the company.

Having personal and business bills and mail come to the same address doesn’t classify as commingling in and of itself. However, business owners must make sure that they pay personal bills with personal funds and business expenses with business funds.

When using a home address to incorporate a business, failing to maintain that separation could result in a court ruling that the corporate veil has been pierced. That means the business owner may find that personal assets (home, car, bank savings, retirement accounts, etc.) could be used to settle legal disputes or debts of the company. With one of the primary benefits of forming an LLC or incorporating being limited liability protection for business owners, it’s critical to maintain separation between business and personal financials, contracts, activities, and assets so that it’s clear the business exists independently of its owner(s).

Zoning Considerations

Zoning laws vary, so business owners should check with their municipality to make sure they’re allowed to run a business from their home. Local ordinances might exist that restrict running commercial operations out of the home. Those restrictions might only affect certain types of home-based businesses or all business operations regardless of what they do. Before using a home address for your official business address, it’s critical to understand whether it’s legal to run a business from a residential property.

Rental Conditions and Homeowner Association Rules

People who rent an apartment or house and those who own condos must follow the rules set by their landlords and homeowner associations. That’s why it’s important for entrepreneurs who want to start a home-based business to check the terms of their lease or homeowner agreement. In either case, it’s possible restrictions have been included in the contracts to prevent unwanted noise, increased traffic, parking issues, and other disruptions that might not sit well with neighbors or the surrounding community.

In some cases, landlords and homeowner associations might be willing to bend the rules and allow a home-based business if the business owner can demonstrate that it won’t create any issues for the property owner or managers. For example, if a professional services provider only works with clients at the customer’s location or remotely, that business owner might get the green light since the public and other residents wouldn’t be bothered.

Professionalism

Some customers might perceive that an entrepreneur who is using a home address to incorporate a business is less professional or serious than one who has a unique business address. Hopefully, most people aren’t that judgmental. However, in some instances, it might mean the difference between them choosing to do business with one company over another.

Alternatives to Using Your Home Address

Options exist for business owners who want to operate their LLC from their home, but who don’t want to publicize their home address:

• Local Post Office – One alternative is to ask the local post office for a P.O. box. Some post office locations also offer USPS Street Addressing Service. This service assigns a P.O. box and then uses the post office’s street address and the P.O. box number to create a real address for the business.
• UPS Store – Another option is the UPS Store’s Mailbox Etc. service that provides a mailbox (that’s accessible 24/7 at some locations) and a real address. According to the UPS Store website, “Your mailing address will be the address of The UPS Store location, with either PMB (private mailbox) or the pound symbol (#) designating your individual box. Instead of The UPS Store, your name appears first.”

Keep in mind that these address alternatives aren’t usually suitable as a registered agent address or a registered office. Most states require a registered office and agent to have a physical address in the state of formation (or where foreign qualified) where they can be available during normal business hours to receive service of process for the LLC or corporation.

Don’t take that last statement lightly. In many states, failure to have a proper registered agent and registered office will result in the involuntary closure of your business. Due to this, if you decide to use a US Post Office or UPS Store for your address, make sure you spend time researching the requirements for your state of formation.

What’s Address is Right for Your Business?

As I mentioned at the start of this article, it’s imperative to get professional legal, accounting, and tax guidance before making crucial decisions.

CorpNet, of course, is here to assist you after you’ve made those decisions. No matter which state you’re forming or foreign qualifying your business in, we can help you prepare and submit your registration paperwork. We provide registered agent services in all 50 states, as well, so our address within your state goes on public record, keeping your home address private.

Contact us today to learn more about how we can help you with your business filing needs!

Did you know many businesses will have a new federal reporting requirement in 2024? Most registered business entities — like Limited Liability Companies (LLCs) and Corporations — must file a beneficial ownership information (BOI) report with the Financial Crimes Enforcement Network (FinCEN).

In September 2022, FinCEN, a bureau of the U.S. Department of Treasury, announced its final rule requiring certain entities to report their beneficial ownership information. The BOI report is designed to provide transparency about who owns and benefits from an LLC or Corporation. It requests identifying information about the entity’s beneficial owners (the individuals who directly own or control a company).

The purpose of the reporting requirement is to make it more difficult for unscrupulous individuals to get away with illegal or improper gains through shell companies or other questionable ownership arrangements. It will provide the U.S. government with information that can potentially help it enhance national security and protect financial systems from criminals who traffic drugs, commit fraud, launder money, and engage in other illicit activities.

There is no cost to submit a BOI report to FinCEN.

Who Must File a BOI Report?

A company must submit a BOI report if it meets the FinCEN’s beneficial owner reporting rule’s definition of a “reporting company” and does not qualify for an exemption.

How do you determine if your business qualifies as a reporting company? Reporting companies are classified as either domestic or foreign.

The criteria for domestic or foreign companies include:

• Domestic reporting company – A corporation, LLC, or any business entity created through filing a registration document with a secretary of state (or similar) office under the law of a state or Indian tribe.
• Foreign reporting company – A corporation, LLC, or other entity formed under the law of a foreign country that filed a document with a secretary of state or any similar office to register to do business in any U.S. state or tribal jurisdiction.

LLCs and C Corporations (including those with S Corporation status) fall under these definitions. Likewise, other entity types formed by filing registration documents with the state may be considered reporting companies — e.g., Limited Partnerships, Limited Liability Partnerships, Limited Liability Limited Partnerships, and business trusts.

FinCEN’s website provides a chart in its Small Entity Compliance Guide to help you assess if your company must report beneficial ownership information.

Who Is Exempt from BOI Reporting?

Sole Proprietorships and General Partnerships are not required to report business ownership information because they are not registered legal entities.

Also, FinCEN’s reporting rule has named 23 types of companies that may qualify for exemption from filing a BOI report. If an LLC or Corporation in one of the categories meets the exemption criteria for that category, it does not have to file a BOI report.

Entities that meet the criteria for any of the 23 exemption types are excused from the beneficial ownership reporting rule:

1. Securities reporting issuer – An entity is exempt if it is either an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934 or it is an entity required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934.
2. Governmental authority – For exemption, the entity must be established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States and it must exercise governmental authority on behalf of the United States or any such Indian tribe, State, or political subdivision.
3. Bank – An entity is exempt if it is a “bank” as defined in section 3 of the Federal Deposit Insurance Act or section 2(a) or 202(a) of the Investment Company Act of 1940.
4. Credit union – To be exempt, an entity must be a “Federal credit union” as defined in section 101 of the Federal Credit Union Act or a “State credit union,” as defined in section 101 of the Federal Credit Union Act.
5. Depository institution holding company – An entity is exempt if it is a “bank holding company” as defined in section 2 of the Bank Holding Company Act of 1956 or it is a “savings and loan holding company” as defined in section 10(a) of the Home Owners’ Loan Act.
6. Money services business – For exemption, an entity must be a money transmitting business or a money services business registered with FinCEN.
7. Broker or dealer in securities – An entity is exempt if it is “broker” or “dealer,” as defined in section 3 of the Securities Exchange Act of 1934 and it is registered under section 15 of the Securities Exchange Act of 1934.
8. Securities exchange or clearing agency – An entity is exempt if it is an “exchange” or “clearing agency,” as defined in section 3 of the Securities Exchange Act of 1934 and the entity is registered under sections 6 or 17A of the Securities Exchange Act of 1934.
9. Other Exchange Act registered entity – To be exempt, an entity, it must be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and not be a securities reporting issuer (Exemption #1), broker or dealer in securities (Exemption #7), or securities exchange or clearing agency (Exemption #8).
10. Investment company or investment adviser – An entity is exempt if it is an “investment company” (as defined in section 3 of the Investment Company Act of 1940) or “investment adviser” (as defined in section 202 of the Investment Advisers Act of 1940) and the entity is registered with the Securities and Exchange Commission under either the Investment Company Act of 1940 or the Investment Advisers Act of 1940.
11. Venture capital fund adviser – The entity must be an investment adviser that is described in section 203(l) of the Investment Advisers Act of 1940 and have filed Item 10, Schedule A, and Schedule B of Part 1A of Form ADV with the Securities and Exchange Commission.
12. Insurance company – The entity is exempt if it is an “insurance company” as defined in section 2 of the Investment Company Act of 1940.
13. State-licensed insurance producer – For exemption, the entity must be an insurance producer authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State and it must have an operating presence at a physical office within the United States where it regularly conducts its business (must be a physical location that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity).
14. Commodity Exchange Act registered entity – The entity is exempt if it is a “registered entity” as defined in section 1a of the Commodity Exchange Act or it is registered with the Commodity Futures Trading Commission under the Commodity Exchange Act as any of the following: futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor, retail foreign exchange dealer.
15. Accounting firm – An entity that is a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002 is exempt from BOI reporting.
16. Public utility – The entity is exempt if it is a regulated public utility and it provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
17. Financial market utility – For exemption, an entity must be a financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010.
18. Pooled investment vehicle – BOI reporting exemption is granted if an entity is an investment company, as defined in section 3(a) of the Investment Company Act of 1940 or a company that would be an investment company under that section but for the exclusion provided from that definition by paragraph (1) or (7) of section 3(c) of that Act and it is operated or advised by any of these types of exempt entities: bank, credit union, broker or dealer in securities, investment company or investment adviser, venture capital fund adviser.
19. Tax-exempt entity – The entity must meet any one of the following criteria to be exempt:
    • It is an organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) and exempt from tax under section 501(a).
    • It is an organization described in section 501(c) of the Code and was exempt from tax under section 501(a) but lost its tax-exempt status less than 180 days ago.
    • It is a political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a).
    • It is a trust, as described in paragraph 1 or 2 of Internal Revenue Code section 4947.
20. Entity assisting a tax-exempt entity – The entity must meet all four of the following criteria:
    • The entity operates exclusively to provide financial assistance to or hold governance rights over any tax-exempt entity described by Exemption #19.
    • The entity is a United States person as defined in section 7701(a)(30) of the Internal Revenue Code of 1986.
    • The entity is beneficially owned or controlled exclusively by one or more United States persons who are United States citizens or lawfully admitted for permanent residence. “Lawfully admitted for permanent residence” is defined in section 101(a) of the Immigration and Nationality Act.
    • The entity derives at least a majority of its funding or revenue from one or more United States persons who are United States citizens or lawfully admitted for permanent residence.
21. Large operating company – An entity qualifies for exemption if all six of the following criteria are true:
    • It employs more than 20 full-time employees. (Generally, “full-time employee” means an employee employed by the entity for an average of 30 or more hours of service per week.)
    • More than 20 of the entity’s full-time employees are employed in the United States.
    • The entity has an operating presence at a physical office within the United States.
    • The entity filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
    • The company reported >$5,000,000 in gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated Form 1120, Form 1120-S, Form 1065, or other IRS form.
    • The gross receipts or sales amount remains greater than $5,000,000 after excluding gross receipts or sales from sources outside the United States.
22. Subsidiary of certain exempt entities – An entity qualifies for exemption if the entity’s ownership interests are wholly owned or controlled (directly or indirectly) by any of the above exempt entities — with the exceptions of money services business (Exemption 6), pooled investment vehicle (Exemption 18), and entity assisting a tax-exempt entity (Exemption 20).
23. Inactive entity – An entity qualifies for exemption if all six of the following criteria apply:
    • The entity was in existence on or before January 1, 2020.
    • The entity is not engaged in active business.
    • The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially.
    • The entity has not experienced any change in ownership in the preceding twelve-month period.
    • The entity has not sent or received any funds of more than $1,000 in the prior 12-month period.
    • The entity does not otherwise hold any kind or type of assets, in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other entity.

Why are those categories exempt? Typically, those companies are subject to other reporting requirements that provide the government with information sufficient for identifying the individuals who own or control them.

When Will FinCEN Accept BOI Reports?

FinCEN will begin accepting the reports on January 1, 2024. No early submissions are allowed.

BOI reporting due dates:

• Existing Companies – Reporting companies created or registered to do business before January 1, 2024, must file their initial BOI report by January 1, 2025.
• New Companies – Any reporting company created or registered on or after January 1, 2024, must file its initial BOI report within 90 days of its formation. The 90-day window begins either when the company receives notice from the state that its creation or registration is effective, or after a secretary of state (or similar office) provides public notice of the reporting company’s creation or registration, whichever is earlier.

Reporting companies must submit updated or corrected BOI reports as needed. There is no annual or other recurring reporting requirement. However, if information about a reporting company or its beneficial owners in a filed report has changed or is inaccurate, the business must submit an updated report within 90 calendar days after the date of the change or within 90 days after it became aware of the inaccuracy. No updated report is required if a company’s applicant information has changed.

BOI Reporting Requirements

The BOI report collects the following information about the reporting company and its beneficial owners and company applicants.

Reporting company information:

• Entity’s full legal name
• Any DBAs or trade names
• Principal U.S. business address
• Formation jurisdiction (state, tribal, or foreign)
• IRS taxpayer ID number (TIN, Social Security Number, EIN)

Beneficial owners and company applicants information:

• Full legal name
• Date of birth
• Complete residential street address (depending on the circumstances, company applicants should use the business address instead).
• Personal identification number and issuing jurisdiction from — and image of — a non-expired U.S. passport; state driver’s license; other ID document issued by a state, local government, or tribe; or a foreign passport if the individual doesn’t have any of the other forms of identification.

If a beneficial owner or company applicant has obtained a FinCEN identifier, the reporting company can include that FinCEN identifier in its report instead of the other information about the entity or individual. A FinCEN identifier is a unique ID number issued to an individual or reporting company upon request. Individuals may request one through an electronic application. A reporting company can request one by checking a box on its BOI report. No one is required to get a FinCEN identifier.

Who Is a Beneficial Owner of a Reporting Company?

Any individual who directly or indirectly exercises substantial control over the reporting company OR owns or controls at least 25% of its ownership interests is a beneficial owner. It’s possible a beneficial owner could have both substantial control and 25% or more ownership interests.

A reporting company can have multiple beneficial owners and must report all of them in its BOI report.

Note that FinCEN has some special reporting rules applicable to certain types of beneficial owners (e.g., minor children, individuals whose ownership interests in a reporting company are held through one or more entities considered exempt from the reporting company definition, and companies that meet the pooled investment vehicle exemption criteria).

What Does Substantial Control Mean?

Four general criteria determine if an individual has substantial control over a reporting company.

If an individual meets at least one of these criteria, they are a beneficial owner:

1. The individual has a senior position of authority — e.g., President, Chief Financial Officer, Chief Executive Officer, Chief Operating Officer, General Counsel, or other title and similar responsibilities.
2. The individual has the authority to appoint or remove any senior officer or a majority of the board of directors (or other governing body).
3. The individual makes or influences important business and financial decisions by the reporting company.
4. The individual has some other form of substantial control over the reporting company. (This is a catch-all criterion for any unique ways flexible company structures might allow individuals control over the business.)

Substantial control might be direct or indirect.

Examples of direct substantial control include:

• Serving on the reporting company’s board of directors
• Owning or controlling a majority of voting power or voting rights
• Having rights associated with financing or interest

Examples of indirect substantial control include:

• Controlling any intermediary entities that exercise substantial control over a reporting company
• Having financial or business relationships with other entities or individuals acting as nominees

What Is Considered Ownership Interest for BOI?

Any individual who owns or controls 25% or more of the ownership interests of a reporting company is a beneficial owner.

An ownership interest can be one or more of the following:

• Equity
• Stock
• Voting rights
• Capital or profit interest
• Any instrument convertible into equity, stock, voting rights, or capital or profit interest
• Options or other non-binding privileges to buy or sell any of the interests mentioned above
• Any other instrument, contract, or mechanism to establish ownership

Who Is Excluded from the Beneficial Ownership Rule?

If an individual considered a beneficial owner matches the description of one of FinCEN’s five exceptions, the reporting company does not have to include beneficial owner information about them in their BOI report.

The five exceptions to the definition of beneficial owner include:

1. The individual is a minor child (provide information about the child’s parent or legal guardian instead).
2. The individual acts on behalf of a beneficial owner as a nominee, intermediary, custodian, or agent.
3. The individual is an employee whose control and economic benefits from the company are derived exclusively from their status as an employee and the person is not a senior officer of the reporting company.
4. The individual’s only interest in the reporting company is a future interest through inheritance. (After the individual inherits their interest, they must be reported as a beneficial owner.)
5. The individual is a creditor of the reporting company.

What Are Company Applicants and Do You Have to Report Them?

Company applicants fall into two categories:

• Direct filer – A direct filer is an individual who physically or electronically files a reporting company’s registration documents to create the business entity.
• Directs or controls the filing action – An individual primarily responsible for directing and controlling the entity formation filing, even though they did not personally file the document with the state.

Company applicants must be individuals, not companies or legal entities. All reporting companies required to provide company applicant information must identify a direct filer. The second category of company applicants only applies if more than one person was involved in filing the reporting company’s formation documents. A reporting company will report a maximum of two company applicants (i.e., one from Category 1 and one from Category 2).

Not all reporting companies must report their company applicant information:

• Required to Report Company Applicants – Domestic reporting companies created on or after January 1, 2024 and foreign reporting companies first registered to do business in the U.S. on or after January 1, 2024
• Not Required to Report Company Applicants – Domestic reporting companies created before January 1, 2024 and foreign reporting companies first registered to do business in the U.S. before January 1, 2024

FinCEN’s Use of BOI Report Data

FinCEN will keep all the information it collects in a secure database. The information will not be publicly available. Federal, state, local, tribal, and foreign government officials may request to obtain beneficial ownership information for authorized activities related to national security, intelligence, and law enforcement. If the reporting company consents, financial institutions may have access to beneficial ownership information under certain circumstances.

Penalties for Not Reporting by the Deadline

A company could face civil penalties of up to $500 per day for each day beyond the report due date if it fails to provide complete and accurate BOI information. The willful failure or attempt to provide false or fraudulent beneficial ownership information could even result in criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000.

How to File Your Report

BOI reports will be filed electronically through FinCEN’s secure filing system. That system will be available starting January 1, 2024, and instructions for completing the BOI report form will be available on FinCEN’s website.

FinCEN is trying to make the beneficial ownership reporting as straightforward as possible. However, this is uncharted territory for business owners. If you need help determining whether your company is subject to the beneficial owner reporting requirements and who should be reported as beneficial owners, consider talking with your attorney, accountant, or FinCEN directly for guidance.

To save you time and give you peace of mind that your BOI report is completed accurately and on time, CorpNet is here to help prepare and file beneficial ownership reports for LLCs, Corporations, and other business entities. Contact us for assistance with this critical new compliance filing!

Maintaining an exceptional staff reigns as one of the essential ingredients for a successful restaurant. With hiring that staff, comes payroll responsibilities and complying with all related federal, state, and local employment and tax laws.

Payroll for restaurants is complex. It entails calculating work hours, wages, salaries, benefits, and wage garnishments; withholding and paying employment-related taxes; reporting and remitting withholdings to the appropriate agencies; and dealing with the nuances of handling tipped employees’ compensation and tax withholdings. The percentage of revenue a restaurant should expect to spend on payroll varies depending on the type of establishment. Fast-food restaurants usually spend less than higher-end, fine-dining eateries. Generally, 25% to 35% is the norm.

In today’s post, I’ll walkthrough what you need to know to maintain compliance and keep your costs down.

Steps for Setting up Payroll for Your Restaurant

Before administrating payroll, restaurants must prepare. I’ve listed the basic steps involved below. Your restaurant may have to fulfill other requirements depending on your location and the laws there.

1. Consider forming an LLC or Corporation for your eating establishment – While not required, registering a business as a Limited Liability Company or Corporation helps protect the business owner’s personal assets. Moreover, it may provide some tax advantages and flexibility. For instance, an eligible LLC or C Corporation can elect to be treated as an S Corporation for tax purposes.
2. Obtain an EIN – An EIN is the federal tax ID number for withholding and reporting federal employment taxes.
3. Set up a payroll bank account – You may find it beneficial to have a separate account for payroll purposes rather than use your restaurant’s primary business bank account for payroll expenses.
4. Determine the method for paying employees – Among the possible options are a paper check, direct deposit, pay cards, or mobile wallet. Some states require employers to pay employees by direct deposit into workers’ bank accounts, which involves obtaining employees’ bank account numbers and their banks’ routing numbers.
5. Register for state payroll tax – State payroll tax registration is required for withholding, reporting, and remitting state payroll taxes. Some states also require getting a separate unemployment tax ID. Depending on where your restaurant is located, you might also have to register for a local payroll tax ID.
6. Determine your restaurant’s payroll schedule – Some states may have specific frequencies for paying employees. Options might include weekly, bi-weekly, semi-monthly, or monthly.
7. Purchase workers’ compensation insurance – A workers’ comp policy compensates employees who are injured or become ill because of their work activities.
8. Prepare to obtain required documentation from employees – This will include a W-4 form to document their filing status and track personal allowances to determine the percentage of payroll taxes to be withheld from their paychecks. Some states have their own forms to determine state-mandated withholdings. Restaurants must also have employees complete Form I-9, Employment Eligibility Verification, to document that each new employee (citizen and noncitizen) hired is authorized to work in the United States.
9. Decide whether you’ll handle your own payroll activities or get professional assistance – Consider this carefully! A lot can go wrong if you calculate payroll incorrectly, miss reporting and payment due dates, or otherwise fail to handle it properly. Payroll software can help, and many businesses find it helpful to have their payroll managed by a payroll company or accounting firm if they don’t have that specialized knowledge in-house.

Restaurant Payroll Taxes and Withholdings

Restaurants with employees must register to pay payroll taxes in their state. If a restaurant has locations in multiple states, it must register to withhold, report, and pay taxes in each state where it has employees. Rules may vary depending on the state, so it’s important to research the requirements and get guidance from an accounting or payroll specialist if you’re unclear about your responsibilities.

Below is a list of employment-related taxes that restaurants may have to withhold or pay:

• Federal income tax – Restaurants must withhold federal income tax from employee pay based on an employee’s taxable wages and tip income and the allowances the worker selected on their W-4 form.
• State income tax – Restaurants must withhold state income tax from employee pay based on a worker’s taxable wages and tip income. Some states, but not all, have allowances to reduce the tax withheld.
• Local income tax – Restaurants must withhold local income tax from employee pay based on a worker’s taxable wages and tip income.
• FICA – Restaurants must withhold half of their employees’ Social Security and Medicare Taxes from their workers’ pay, and the restaurant must pay the other half. Learn more about FICA.
• State and local payroll taxes – Some might be paid directly by the restaurant while others might be withheld from employees’ pay – the rules vary by state and local jurisdiction.
• Federal unemployment tax – Restaurants pay the FUTA tax. No portion of FUTA may be withheld from employees’ paychecks.
• State unemployment tax – SUTA (or SUI) is usually paid by employers and not withheld from employee paychecks.
• Workers’ compensation insurance – This cost is paid by the restaurant and not deducted from employee paychecks.
• Employee wage garnishments – Restaurants must withhold wage garnishments — such as for alimony, child support, and unpaid taxes — from employees’ paychecks.
• Benefits and other voluntary deductions – There may be other deductions restaurants withhold from employees’ pay — such as 401K contributions, medical insurance plan premiums, health savings plan contributions, and others.

How to Calculate a Restaurant Employee’s Take-Home Pay

Payroll calculations involve the following elements:

1. Gross Pay – Restaurants must calculate their employees’ gross pay according to their hourly wage (or salary) and any tips received. Gross pay also includes bonuses earned by employees.
2. Pre-Tax Deductions – Any deductions not subject to tax, such as 401K contributions and medical insurance premiums, should be subtracted from gross pay.
3. Tax Deductions – After subtracting pre-tax deductions from gross pay, the restaurant should deduct taxes from the adjusted amount.
4. Other Deductions – Next,  the restaurant should subtract any additional voluntary or court-ordered deductions — e.g., court-ordered wage garnishments, Roth 401K contributions, and charitable contributions.
5. Net Pay – The money remaining is the employee’s net (take-home) pay.

Managing Tips and Payroll

According to the U.S. Department of Labor, tipped employees are those engaged in an occupation that regularly receives over $30 per month in tips. Examples of tipped restaurant employees include servers, bartenders, bus people, barbacks, and baristas.

The employer of a tipped employee is only required to pay $2.13 per hour in direct wages if that amount, plus the tips received, equals or exceeds the federal minimum wage. The employer must make up the difference if the direct wages and tips do not equal or exceed the federal minimum hourly wage. Some states require employers to pay direct wage amounts higher than the federal minimum to tipped employees.

All tips received by employees — whether cash or checks received directly from customers, paid over to the employee from tips charged on credit or debit cards, or received from other employees through a tip-sharing arrangement — are taxable under the law. Employees must also record the value of non-cash tips (e.g., event tickets, gift cards, etc.)

Restaurants must factor tip income into their payroll deductions from employees’ pay. They must retain their employees’ tip reports, withhold income taxes and the employee’s share of Social Security and Medicare taxes based on their wages and tip income, and remit those taxes to the government. Restaurants must also pay the employer’s share of the Social Security and Medicare taxes on their employees’ wages and reported tips.

Important note: When a restaurant adds service charges or automatic gratuities to a customer’s bill, they are considered business revenue, not employee tips. If the restaurant divides those monies among its staff, they must be treated as wages, not tips.

Why Restaurant Employees Should Report All of Their Tips

Although servers, bartenders, bussers, and other tipped employees may feel tempted to under-report their tip income, it’s important they do because it’s illegal not to.

Restaurant owners and managers can encourage their employees to report all of their tips by sharing the advantages of doing so. The more tip money an employee reports…

• The more Social Security benefits they’ll be eligible for when they retire.
• The more money they can contribute to their employer-provided 401K plan.
• The more money they will receive in unemployment benefits if they lose their job through no fault of their own.
• The more workers’ compensation benefits they can receive if they are injured on the job.
• The more easily they may qualify for a loan or line of credit.

Let restaurant employees know that if they must share their tips with other employees (for example, servers sometimes give some of their tips to bartenders and bus people), only the tip amount they keep is taxable to them. The other employees who received a portion of an employee’s tips must report the amount they received.

A quick word about tip-pooling: Typically, tip sharing is allowed among staff with direct contact with customers and who are getting paid less than minimum wage in their wages — such as servers and bartenders. However, if a restaurant owner pays workers the full minimum wage or more, they may pool employees’ tips and distribute them to all employees according to a defined policy. So, back-of-house employees (e.g., chefs and dishwashers) also get a portion of the front-house tips.

As you can imagine, workers may find it daunting to track their tips. Fortunately, the IRS offers some resources to encourage compliance with tip-reporting rules and make it easier for employees to keep accurate tip records.

• The IRS Tip Rate Determination/Education Program (TRD/EP) – This voluntary program offers two agreement-based options: 1) Tip Rate Determination Agreement (TRDA) and 2) Tip Reporting Alternative Agreement (TRAC). Both help restaurants get employees to report their income accurately and minimize lengthy IRS examinations. The IRS offers more information about the program in Publication 3144, A Guide to Tip Income Reporting for Employers in Businesses Where Tip Income is Customary.
• Publication 1244, Employee’s Daily Record of Tips and Report to Employer – This booklet serves as a reporting tool to keep track of tips. It Includes two forms — 4070A (Employee’s Daily Record of Tips) and 4070 (Employee’s Report of Tips to Employer).

Forms for Reporting Restaurant Employee Wages and Tips

• IRS Form 4070A for Employee’s Daily Record of Tips – Employees may use form 4070A or an alternate record-keeping document to record the tips they receive during their work shifts.
• IRS Form 4070 for Employee’s Report of Tips to Employer – Employees must report their tips received in a month to the restaurant by the 10th of the month after the month the employee received the tips. Employees may use this form to report their tip income (cash, credit card, and amounts paid to them from other employees) to the restaurant if they earn $20 or more in tips during the month. Or they can use a similar form of documentation as long as it contains the same information requested on Form 4070:
  • Employee signature,
  • Employee’s name, address, and social security number,
  • Employer’s name and address (establishment name if different),
  • Month or period the report covers, and
  • Total of tips received during the month or period.
• IRS Form 4137 for Social Security and Medicare Tax on Unreported Tip Income – Employees use form 4137 to report and pay their share of Social Security and Medicare taxes on tips they didn’t report to the restaurant.
• IRS Form 8027 for Employer’s Annual Information Return of Tip Income and Allocated Tips – If a restaurant is considered a large food or beverage establishment, it must file this form each year. Responsibility for submitting this form comes when a restaurant meets all of the below criteria:
  • It is located in the 50 states or the District of Columbia,
  • It provides food or beverages for consumption on the premises (excluding fast food operations),
  • Tipping by customers is customary,
  • It regularly had more than 10 employees on a typical business day during the prior calendar year.
• IRS Form 941 for Employer’s QUARTERLY Federal Tax Return – Restaurants must report income tax, Social Security tax and Medicare taxes withheld from their employees’ wages (including tips), and the employer’s share of Social Security and Medicare taxes on Form 941. They must then deposit those monies according to federal requirements.
• IRS Form 940 for Employer’s Annual Federal Unemployment (FUTA) Tax Return – Most restaurants must also file Form 940 to report and pay FUTA tax on employees’ wage and tip income. The restaurant pays FUTA tax; no money is withheld from employees’ paychecks.
• IRS Form W-2 for Wage and Tax Statement – Restaurants must provide a W-2 form at the end of the tax year to each employee to whom they paid $600 or more or whose compensation (regardless of the amount) had income taxes, Social Security tax, or Medicare tax withheld.

A large food or beverage restaurant must allocate tips if the total tips an employee reported during any payroll period are less than that employee’s share of 8% of the business’s food and drink sales. There are various methods of allocating tips, so consider talking with an accounting professional to discuss which option will work best in your situation. Tips allocated to employees should be shown on the worker’s Form W-2, Wage and Tax Statement.

What Happens If Employees Don’t Report Their Tips?

Not reporting tips could mean the employee will have to pay back taxes and penalties (up to 50% of the FICA taxes and 20% of the income taxes they owe on tips). They might even have to pay interest for all the years they didn’t report their tips truthfully.

A restaurant is not required to withhold or pay the employee’s share of Social Security and Medicare taxes on unreported tips. It must, however, pay the employer’s share of those taxes when the IRS issues a Section 3121(q) Notice and Demand.

Options for Managing Your Restaurant Payroll

While restaurant owners may consider handling payroll tasks themselves, things can go awry if they don’t have knowledge in-house about all the rules or if they don’t have adequate time amid their other duties to devote the time required to do it accurately.

At face value, the DIY approach may seem like a money-saver. But ultimately, it can become more costly if they get penalized because of missing reporting deadlines, failing to calculate wages or withholdings correctly, or not making deposits on time.

Using payroll software can help immensely because it’s specially designed to calculate income and withholdings, manage benefits, collect and store forms, and streamline other aspects of the process.

Another option is to outsource payroll tasks to an accounting firm, bookkeeper, or payroll solutions provider who understands all aspects of the payroll process and uses reliable payroll software to ensure accuracy and efficiency.

Additional Considerations

• Look for a good employee time and attendance system to accurately track employee hours, wages, and any movement between different shifts or job positions (particularly if the wages vary depending on the shift work or the job performed).
• Generally, a tip (whether cash or left on a credit card) is the property of the employee to whom it was given. However, some states allow restaurants to subtract credit card processing fees from charged tips.
• Maintain payroll records for the required. While the IRS requires employment-related tax records to be kept for four years, it’s not uncommon for businesses to hold on to them for seven years to cover state and federal statutes of limitations.
• Besides payroll-related regulations, restaurant owners must also comply with other hiring and employment laws. Several include:
  • Fair Labor Standards Act (FLSA)
  • Occupational Safety and Health Act (OSHA)
  • Family and Medical Leave Act (FMLA)
  • Employee Retirement Income Security Act (ERISA)
  • Anti-discrimination laws

Administrating payroll can be a time-consuming, intensive process that demands knowing and complying with all federal, state, and local tax laws. If your restaurant doesn’t have in-house staff with the time and expertise to do it right, seek the professional help you need to handle payroll lawfully and accurately.