Top Payroll Mistakes Restaurants Make at Year-End (And How to Avoid Them)
You know how chaotic the end of the year can get for restaurant owners. You’re closing out the books, keeping up with holiday rushes, and making sure your team gets paid on time, so payroll might be the last thing you want to double-check. But don’t compromise on that because that’s where the costliest mistakes tend to happen.
Tipped wages, service charges, overtime and multi-role employees make restaurant payroll especially tricky. A small error in how tips are recorded or how overtime is calculated can snowball into tax headaches or missed credits. The good news is that most of these problems are easy to prevent once you know where to look.
Let’s go through the top payroll mistakes in restaurants that owners make at the end of the year and how to avoid them before they turn into bigger issues.
#1 – Misclassifying Tips, Service Charges And Wages
One of the biggest trouble spots for restaurants is mixing up tips and service charges. It’s an easy mistake to make because they both show up on the customer’s bill, but they’re not treated the same way in your payroll or by the IRS.
Voluntary tips are amounts customers choose to give your staff. Automatic gratuities or service charges, like those added for large parties or catered events, are not tips. The IRS considers them as wages (not tip wages) and expects you to categorize them as such. This will affect how you calculate taxes, overtime, and employer credits.
If your POS system automatically dumps both into a single “tips” category, that needs to change. Voluntary tips, service charges, and regular wages should be clearly separated in your POS and service charges should run through payroll as wages, not tips. Otherwise, you could end up under-withholding taxes or misreporting wages, which throws off your FICA tip credit and payroll taxes.
If you’re on Xero and need to sync your POS data, we can help. This is now even more critical with the changes in the 2025 tax bill, we’ve explained it here: 2025 Restaurant Tip Law Changes Explained
#2 – Poor Tip Reporting, Time Tracking and Overtime Calculations
Sometimes employees forget to log tips daily or your time clock doesn’t capture when someone switches from hosting to bartending, those small gaps can lead to underreporting and inaccurate overtime pay.
For example, tipped employees are supposed to report all tips of $20 or more in a month. If they don’t, your payroll records won’t match what’s actually happening on the floor and that can affect your payroll tax filings. On top of that, overtime gets complicated when employees wear multiple hats. If a bartender picks up kitchen prep shifts, their “regular rate” for overtime isn’t just their base pay. It should include any nondiscretionary bonuses or service charge income they’ve earned.
To fix this, it’s best to keep your process simple and consistent by having staff submit a written or digital tip report every pay period. You can also use a time clock or scheduling system that lets employees record which role they’re working each shift. At the end of the year, you should reconcile your reported tips, total hours and overtime pay for the entire year.
#3 – Misclassifying Employees
If you incorrectly label staff as contractors or exempt employees, it can cause serious compliance problems. A server who takes shifts regularly and works under your supervision is almost always an employee, not a contractor. Likewise, most restaurant managers don’t qualify as exempt under the overtime rules, unless they meet very specific tests. Misclassifying these roles can lead to back pay, penalties and a lot of stress down the road.
#4 – Missing Tax Deposit Schedules, Filings and Records
Every employer has a monthly or semi-weekly deposit schedule depending on the amount of tax you withhold. If you miss a deposit date, you could incur penalties and interest from the IRS and these add up fast. Those W-2 and 1099 forms are also due to both the IRS and your employees by the end of January. Be sure you have the required information, like names, addresses, or Social Security numbers, as any errors could slow things down.
Before you close out the year, double-check that every payroll tax deposit has been made. Run an employee audit to confirm personal details are correct and make sure you’ve set reminders for all upcoming filing deadlines in January.
#5 – Ignoring Changing Payroll and Labor Laws
Payroll rules change frequently. Minimum wage rates, overtime thresholds, and tip credit laws can all shift from year to year and sometimes even in the middle of the year, depending on your state.
If your payroll system or POS software hasn’t been updated recently, you might be out of compliance without knowing it. In the restaurant industry, where tipped employees, dual roles and variable hours are the norm, those changes matter.
It’s a good habit to schedule a payroll review every Q4 and check for any federal or state changes that could affect your pay structure, tip credits or service charge policies. If you use an outside payroll service, ask them to confirm that your setup matches the latest laws. It also helps to retrain your managers or bookkeeper at least once a year so everyone’s on the same page.
#6 – Missing Out These Year-End Tax Strategies
Payroll isn’t just about compliance; it’s also one of your biggest opportunities for smart tax planning. Before you close the year, there are a few strategic moves that can save you a lot of money come April.
Run an Owner’s Bonus to Cover Personal Taxes
If you’re an S Corp owner, you’ll likely owe personal income tax on your share of the profits. One easy way to cover that is by paying yourself a year-end bonus through payroll. It keeps your books clean and ensures the right taxes are withheld.
Review Profitability for 401(k) or Profit-Sharing Opportunities
If your restaurant had a strong year, don’t wait until tax season to think about retirement contributions. 401(k) and profit-sharing plans must be established before year-end to qualify for deductions. Starting the process in November or December gives you time to finalize the plan documents and decide how much to contribute.
Schedule a Year-End Tax Planning Meeting
Many restaurant CPAs don’t do this proactively; they offer it as an optional add-on, and owners often skip it to save time or keep costs down. Unfortunately, that can lead to unexpected tax bills and penalties when returns are filed. A 30-minute review now can save you thousands later.
At U-Nique Accounting, we sit down with 100% of our clients before year-end to review their taxable income and projected liability.
How U-Nique Accounting Helps Restaurants Plan Ahead
At U-Nique Accounting, we work with restaurant owners to plan smarter. From owner bonuses and tax projections to 401(k) and profit-sharing setup, we make sure you never miss an opportunity to reduce your taxes and strengthen your cash flow.
If you’re not sure where to start, we can run a quick year-end review to make sure everything’s in order before filings are due.
Reach out to our team today and book in your first call in our calendar below!
By MATT CIANCIARULO
