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Is a Service Charge a Tip? Understanding Service Fees vs. Tips 

Is a Service Charge a Tip? Understanding Service Fees vs. Tips 

Picture of Clarissa Buch Zilberman

Clarissa Buch Zilberman

Let’s break down the differences between service charges vs. tips, their potential implications, and ways operators can simplify the process with modern restaurant software.  

In the restaurant world, a debate quietly simmers beneath the clinking of glasses and the sizzle of dishes: service charges vs. tips. What do these fees pay for? Are they tips in disguise? Should guests leave a gratuity on top of a service charge? 

Though these costs are common in restaurants — both involve extra charges to a guest beyond the basic price of a meal — they serve different purposes and have varying reputations. For instance, more than 90% of Americans say they always or often leave a tip when dining at a sit-down restaurant, but nearly 75% oppose automatic service charges. 

What is a restaurant service charge?

A restaurant service charge is an additional fee included on the bill to cover the cost of service provided by restaurant staff. It typically ranges from 10% to 20% of the total bill.  

Unlike tips, which are discretionary and given directly to a server by a guest, service charges are mandatory and are usually predetermined by restaurant management.  

An increasing number of establishments, including both fast-food and upscale restaurants, are implementing service charges, with rates reaching up to 22%. Currently, 16% of restaurant operators incorporate these charges, while 54% of full-service restaurants report they sometimes add them.  

These charges can help guarantee a fixed income for service staff and are common in hospitality businesses beyond restaurants, but their distribution and use vary. Some establishments allocate them entirely to employees, while others use a portion to cover operational expenses like administrative fees or employee benefits. 

Are restaurant service charges new?

Though restaurant service charges are not new, they were historically reserved for large parties, banquet events, and other special occasions.  

Post pandemic, however, more restaurants have integrated these fees into their standard checks as a way to curb rising costs and shrinking profit margins.  

For instance, service charges can help operators: 

  • Offset increasing food, ingredients, and supply expenses 
  • Pay higher wages 
  • Afford rising rent and real estate expenses 
  • Avoid raising menu prices  

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Types of restaurant service charges

There are several types of restaurant service charges. Here are a few examples: 

  • Mandatory service charge: A fixed percentage added to the bill, which is then distributed according to the restaurant’s needs. It may compensate for staff expenses, be shared among various employees, or contribute to overall operational costs.  
  • Discretionary service charge: This fee is similar to an automatic service charge, but it requires a guest’s explicit agreement to be included. This charge is commonly used in situations like large group reservations, special events, holidays, or bottle service. It generally helps compensate for the extra effort and attention required during busy or unique circumstances.  
  • Third-party delivery app service charges. When using a third-party delivery app, both restaurant operators and customers may be subject to various fees to cover delivery and driver costs, platform operational expenses, and more. 

What is a tip?

Tipping is a voluntary amount of money given by a guest to a service worker, directly acknowledging the quality of service provided by waitstaff, bartenders, or other front-of-house employees.  

Though tipping is at the discretion of a guest, the practice is crucial for restaurant workers as it significantly supplements their earnings. It can also have an impact on team morale and job satisfaction, helping attract and retain top talent and reduce employee turnover. 

Unlike service charges, tips are not obligatory, although they are culturally expected in many places, especially in the United States. 

Service charges vs. tips

There are several important distinctions between service charges vs. tips, including:  

  • Service charges are required: Service charges are often mandatory, particularly in group settings or at events, and are intended to cover the costs associated with additional labor, operations, or to offset other business costs. 
  • Service charges are predetermined: Service charges are a predetermined portion of every bill — typically between 10% to 20% of the total meal cost — and are automatically added by the establishment as a line item. Tips are discretionary, though it is also customary to leave a gratuity of approximately 10% to 20% of the total bill. 
  • Service charges are paid to the restaurant: The distribution of service charges is determined by a restaurant. That means they may not always go directly to employees as income. On the other hand, tips go directly to service staff such as waiters and bartenders and are an immediate boost to their earnings. 

Service charge best practices for restaurant owners and operators

If you decide to implement a service charge for all guests, it’s crucial to transparently communicate your reasons. 

Are you aiming to pay your staff above the minimum wage? Is it a response to rising operational costs due to inflation? Are you struggling to afford your monthly rent in a desirable neighborhood? Ultimately, you don’t want a service charge to be the reason guests stop tipping your employees — so transparency is key.  

For example, you can incorporate the following on your menu, social media, website, and in-house signage: “To ensure fair wages and maintain the quality of our service, an 18% service charge is automatically added to each bill. This fee directly supports our dedicated staff, helping us uphold our commitment to their well-being and to offering you a memorable dining experience. We appreciate your understanding and thank you for your patronage.”  

Whatever you decide, clearly inform guests as soon as they are seated to prevent issues. 

 Here are some more tips to keep in mind: 

  • Set expectations: Guests often perceive a mandatory service charge as covering all gratuities, and most will not tip beyond this charge. It’s important to set clear expectations to avoid ambiguity around tipping. 
  • Train your staff: It’s important for waitstaff to be as knowledgeable about service fees as they are about daily specials and food allergens. Proper training on how to appropriately respond to questions about these charges can help prevent any negative impact on the dining experience. 
  • Offer exceptional service: Since customers know they are paying a service charge, their expectations for service quality will likely increase. Focus on providing exceptional service to justify the added cost and enhance guest satisfaction. 

How modern restaurant software plays a role in service charges

Integrated restaurant technology helps operators effectively manage and understand the often-complicated aspects of service charges and tips. By connecting your POS to your management software, you can bypass the need for manual data entry and auditing, leaving you with more time to focus on what matters and reducing the potential for errors and upset among your staff.  

Because this allows you to fully automate much of the tip management process, you can configure your system to suit the specific needs of your restaurant. For instance, you can customize automated tipping rules and procedures to ensure tips and charges are distributed fairly, correctly, and in accordance with company policies.  

Although restaurant accounting software has simplified many aspects of this process, operators should consult with experts and must ensure compliance with relevant laws and regulations 

The bottom line

While service charges and tips might seem similar at first glance, they are different in nature, distribution, and impact. Providing clarity on your establishment’s policies regarding these charges not only enhances the dining experience but also ensures your staff is recognized and tipped for their work. 

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