Franchise payroll includes everything related to paying employees at a franchised location. Though keeping track of everything can be tricky, payroll outsourcing can simplify and streamline this process.
What you’ll learn
What you’ll learn
Key takeaways
- Payroll management can be one of the most complex parts of franchise ownership, but franchise owners have options, including payroll software, to ease the burden
- Tax compliance and wage regulations are two key components of franchise payroll. Both must be managed carefully
- Franchise owners are responsible for complying with all local and federal labor laws
Whether you’ve decided to invest in an opportunity with a national franchise chain (or are starting your own and know that down the road, you’ll need to provide some best practices), this guide outlines key payroll considerations, such as tax compliance, wage regulations, and even the records you’ll want to hold onto. It also provides best practices for managing payroll across multiple locations and ensuring compliance with local and federal labor laws.
Keep reading if you are considering potential franchise opportunities and want to learn more about payroll management.
Who is responsible for paying employees in franchises?
As the franchise owner, you are responsible for paying your workers on time.
How do franchise owners get paid?
Franchise owners are typically paid based on business sales revenue rather than a set salary. The franchisees enjoy the remaining profits after paying business overhead costs, such as inventory, staffing, rent, taxes, and utilities.
Often, this is spelled out in a franchise agreement with the business owner ahead of time to prevent surprises. It is important to discuss and understand income potential before signing a contract.
Key payroll considerations for franchise owners
If you are considering becoming a franchise owner, here are some considerations when it comes to paying workers.
Tax compliance
Tax compliance should be a top priority for every franchise owner to avoid fines and penalties. The good news is that franchises enjoy certain benefits, such as the ability to deduct the franchise fee over 15 years, plus the opportunity to write off business expenses, including royalty fees.
However, since franchises often operate in multiple states, owners should pay careful attention to tax laws in each state. That said, many franchise owners choose to work with an accountant who has expertise in this area and can also outline LLC tax benefits.
An accountant can also help you determine the difference between an S Corp and vs. LLC structure and which option makes the most sense for your business for tax purposes.
Wage regulations
Similar to tax compliance issues, franchise owners must pay their employees the highest applicable minimum wage under local, state, and federal laws. Although this may vary from location to location, wage regulations are another essential payroll consideration for franchisees.
Payment frequency and methods
Franchise owners must also pay close attention to payment frequency and various payment methods. After you make your initial payment to purchase a franchise, you will pay ongoing royalty fees while also paying employees at an agreed-upon interval. Payments must be regular and error-free to prevent fees and fines.
Payroll software options for franchises
Payroll software can simplify everything related to payroll and HR for franchise owners, whether you own one location or several. You can run multiple locations from one streamlined dashboard, manage multiple pay rates (including overtime and tips), and choose to pay your team by direct deposit, debit card, or check.
In addition to fact-checking this article, we asked Peggy James, CPA and small business consultant, to address a key concern for prospective franchise owners.
What are common challenges in managing franchise payroll?
“One of the most common challenges in managing franchise payroll is similar to those experienced by many business owners: how to handle payroll when they may not have specific skills or training for the task. Being a franchisee adds another layer of complexity, since they also need to make sure they’re following the rules of the franchise agreement and will most likely be responsible for paying royalties to the franchise based on revenue.”
— Peggy James, CPA
Getting payroll right the first time is vital, so having an expert in your corner is always a good idea (and why some franchisees find it helpful to work with a payroll provider).
Best practices for franchise payroll management
Incorporating the following best practices for franchise payroll management will help your business run more smoothly and successfully:
- Implement efficient time-tracking systems: Automated time tracking for your franchise’s team members will make it easy to record hours worked and encourage accountability. If you do not already have one in place, you can work with a third-party vendor to add one.
- Maintain accurate payroll records: Accurate payroll is an absolute must. Your employees want to get paid what they are owed and deserve to be paid on time. Likewise, the business owner also wants to receive accurate, on-time royalties from you.
- Keep up with labor law updates and tax regulations: Labor and tax laws evolve over time. Make sure you are keeping up with any changes in codes or regulations that may affect your business or your team members.
- Use franchisor-provided resources and support: When you purchase a franchise, the business owner often offers support in the areas of training, marketing, and business development, for instance. It is a great idea to take advantage of these helpful resources to support the growth of your franchise without extra investment on your part.
These simple best practices for franchise owners can help prevent costly errors and keep your franchise running smoothly.
“OnPay has been simple and easy to use, saving our family business time and money. It’s reliable, affordable, and scaled effortlessly as we expanded to a second franchise and into our 2nd and 3rd states. Really good value.”
— Steve Lossing, Mathnasium
Keeping compliant with labor laws
Just as it is essential to remain compliant with tax laws, your franchise must comply with both local and federal labor laws to remain in overall good standing.
Here are some tips for complying with labor laws:
- Understand Fair Labor Standards Act (FLSA) regulations: The Fair Labor Standards Act (FLSA) sets rules for workers’ minimum wage, overtime pay, and more. Your business must comply with all of these regulations.
- Manage wage disputes and payroll audits: Transparency is key to managing wage disputes and payroll audits. Your franchise’s clear payroll policies and accurate records will make resolving potential disputes and handling ongoing audits easier.
- Avoid common payroll mistakes that lead to legal issues: Today, the most common payroll mistakes that lead to legal issues are missing payroll deadlines, misclassifying employees, failing to pay overtime for workers or report all taxable income, late payments, and not reporting wage garnishments. Avoiding these notable errors means your payroll will be clean and clear.
Again, complying with labor laws is a must for all franchise owners.
Get familiar with franchise payroll to keep ahead of the rules
Owning a franchise involves juggling multiple responsibilities — from sourcing talent and driving growth to mastering the complexities of payroll management. While it can be a life-changing business opportunity, understanding what’s involved upfront makes all the difference, whether you’re handling payroll for a single location or managing multiple franchises across different states. If you have any questions, the OnPay team is here to help!
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.