Managing Payroll For Franchises - A Simple Guide For Owners

Whether you’re a new franchise owner or have been operating your business for a while, it can be challenging to understand the ins and outs of payroll for franchises. From hourly wages and tips to paying yourself as the owner, there’s a lot to consider when running payroll. So what’s the best way to proceed?

In this article, we’ll discuss common issues that come up with franchise payroll, including how to process payroll, top wage and hour considerations, paperless pay, and more. After reading this, you’ll know the steps to take to make sure you pay your staff accurately and on time for greater employee satisfaction – and compliance.

Who pays employees in a franchise?

In most cases, you as the business owner are responsible for running payroll, among other operational tasks. That’s because most franchise systems grant that franchisees, while having to comply with certain system standards, are independent businesses with responsibility for the day-to-day operation of their own businesses. Your responsibilities in this regard will usually be described in a franchise agreement or disclosure document, which will list the support and services the franchisor will provide.

Keep in mind that in a small number of cases, you may be considered a joint employer with your franchisor and share liability for issues governed under the Fair Labor Standards Act (FLSA), meaning, you’d both be responsible for payroll and any compliance violations that arise.

You and the franchisor are considered joint employers if the franchisor has control over terms and conditions of the employment relationship, the degree to which was outlined in a Department of Labor Final Rule that sought to clarify the joint-employer standard. That rule has since been rescinded and courts around the country are now applying various multi-factor tests to make this determination. However, if you’re deemed to be a joint employer with your franchisor, you would both be liable if, for example, you fail to pay an employee on time.

How does payroll for franchises work?

Before you run your franchise payroll, you’ll need to take a number of steps to get started.

Pull Together Employee Data: You’ll need to have specific information about your staff such as their name, address, birthdate, compensation, and Form W-4 withholdings.
Make Sure to Correctly Classify Workers: Be sure you determine whether your employees are W-2 or 1099 workers so you know if you have to withhold and file payroll taxes.
Determine Exempt Vs Non-Exempt Status: Many franchises have hourly employees, who are considered non-exempt and subject to the Fair Labor Standards Act’s overtime and minimum wage rules, among others. So you’ll want to correctly identify exempt and non-exempt status if you’re covered by the FLSA, which governs establishments with annual gross sales of at least $500,000.
Select Your Pay Frequency: You’ll want to pick how frequently you plan to pay workers such as weekly or biweekly. Be sure to follow any requirements your state may have in place to ensure compliance.
Track Time: Whether you use manual time sheets, software like Quickbooks, or POS time tracking system, you’ll need to calculate hourly totals based on your payroll policies, including overtime, and track any changes to hours data.
Calculate Pay: To calculate your employees’ pay and process payroll, you’ll first determine the amount of their gross pay, then take into account any deductions or exemptions from their income. These can include federal, state, and local taxes, Social Security, and contributions from benefits such as their health insurance. After you subtract these amounts, you’ll get what’s known as net pay or take-home pay, which is what you’ll pay your worker.
Pay Employees: You have more choices today for paying employees. You can pay them by paper check or a paperless pay method like direct deposit, pay card, digital wallet like Venmo, or instant pay app. Again, you’ll want to check with your state’s labor department to make sure the method you select is allowed. For example, in some states, you can only pay workers by direct deposit if you also offer them paper checks as a payment option.

How do I handle tips?

If you’re in the food and beverage industry and have tipped workers, under the FLSA, you’ll need to make sure that your employees’ combined cash and tip rate total at least minimum wage, which is $7.25 an hour or higher depending on state and local laws. So if workers earn enough in tips to make up the difference you only have to pay a cash wage of $2.13 an hour and the rest -- $5.12 – is what’s known as a federal tip credit.

How do I file payroll taxes as a franchise owner?

As we mentioned earlier, you’ll need to withhold certain taxes from your employee’s paycheck and, every quarter, report and pay to the IRS those amounts on Form 941, Employer’s Quarterly Federal Tax Return. If you have tipped employees, keep in mind that all cash and non-cash tips are treated as a form of income and subject to taxes.

Most employers will also have to file Form 940 for FUTA taxes and deposit those taxes.

It's important to note that you can incur penalties when you fail to pay these taxes or don’t pay them on time.

Can I run franchise payroll on my own?

When it comes to processing payroll, many franchises choose to invest in a payroll service or to work with an accountant to avoid much of the cumbersome administrative and tax-related work. That’s because you can be easily overwhelmed by payroll responsibilities and may want to focus instead on growing your business.

That’s not all. Getting payroll right is also essential to avoiding costly consequences. For example, you’ll be responsible for paying employees correctly and on time. You also need to properly calculate your payroll tax obligations and submit them in a timely manner along with filing quarterly tax reports. Even if you have someone else in your company who can take on these roles, it still takes a lot of time – almost 5 hours each pay period.

However, you may decide these factors aren’t deal breakers and opt to run payroll yourself. If you do, there are several benefits to keeping payroll in house. For instance, you’ll have control over sensitive employee data and greater flexibility if you pay cash wages or pay employees for the current pay period instead of in arrears. In addition, you won’t have to pay a payroll company, which generally charges $200-$250 per employee per year.

What should I look for in a payroll system for franchises?

If you decide you want to evaluate third-party vendors who have payroll software for franchises, you have lots of options. To narrow down your list and find the right fit, there are many factors to consider. Some of the key points of differentiation that you’ll want to evaluate include:

Cost: While vendors may charge you differently based on what services they include, generally, you can expect to pay about $200-$250 per employee per year. Ask for a firm quote from vendors so you can compare your options.
Available Features: Even if your franchisor offers basic HR support like an employee handbook, you may be looking for more comprehensive help and want your payroll vendor to help you with additional tasks. If so, check if vendors offer help with things like recruiting, compliance, or benefits.
Ease of Implementation: While any payroll vendor will get you up and running pretty quickly, you’ll want to ask any providers you’re considering about their process and timing so you know what you can expect and the type of support you’ll get along the way.
Support: Even after you’re live, you may need help periodically with your payroll so you’ll want to check on the type of customer service a vendor offers. For example, will you dial into a call center or get access to a dedicated specialist?
System Integration: Whether you’re using a POS time tracking solution, accounting platform, or even just Excel to run your business, you may want a provider whose systems integrate seamlessly. That way, you can be sure your data will flow between the systems to optimize your efficiencies. As you evaluate vendors, confirm the systems will pair and how they will handle the transition to make sure things run smoothly.
Location: You have plenty of national vendors to choose from and that may be the route you decide to go. But if you would prefer that more personalized support is best for your business, you may want to look for a local vendor. To target your search, determine what approach will make you most comfortable.

How to Best Run Payroll for Franchises

Since there are several special considerations when it comes to franchise payroll, and it can take a lot of time and focus to get it right, you may want to outsource your payroll. If you decide on this option, and you evaluate potential vendors based on the criteria we just outlined, you may want to learn more about Complete Payroll Solutions to see if we could be a fit. Visit our dedicated franchise page to learn more about the services we offer owners.