Service Charge vs Tip: What Every Restaurant Owner Needs To Know

When dining at a restaurant in the United States, doling out extra money for a tip is an expected courtesy, particularly when you receive stellar service. But if your bill already comes with an additional service charge, you’re probably wondering: what exactly am I paying for? The service charge vs tip debate has left many diners scratching their heads.

You might even feel conned when your check arrives with a surprise fee, especially if no explanation is provided in the fine print of the menu or restaurant website, or by the server at the beginning of the meal. 

As of 2023, 72% of adults say they oppose automatic service charges restaurants tacked onto their bills, but maybe some of that opposition is due to misunderstanding the function of a service charge—and who it benefits. 

While service charges aren’t usually loved by customers, they do have benefits for owners, managers, and servers. So if you run a restaurant and want to start including service charges, it’s important to learn the differences between tips and service charges. You also need to know how to clearly communicate these differences to your workers and guests so everyone’s on the same page. 

Luckily, we’ve got you covered.

What is a service charge at a restaurant?

A service charge is a fixed fee, typically ranging between 3-20% of the total cost of the bill, that restaurants can add to every dining party’s check. This fee is collected by restaurant owners who then decide how it’s allocated, from compensating both the back-of-house (BOH) and front-of-house (FOH) teams to offsetting rising food costs. 

According to the National Restaurant Association’s 2023 report, 15% of restaurants are now charging a service fee. And that number is expected to climb. But what do these service charges actually cover? And how do they benefit you—the restaurant owner—and your workers? 

Types of restaurant service charges.

To answer both questions, we first need to get into the nitty gritty of different types of service charges, and when to implement them.

Mandatory service charges.

This is a fixed fee included on every bill that the customer is required to pay. If you don’t give your diners a choice to opt out of this service charge, it’s crucial to let them know upfront so they don’t feel deceived when the check comes. Even better, be transparent about what this fee covers and why your guests are being charged for it. 

Some examples include:

• An automatic gratuity that’s tacked onto the checks of larger dining parties or restaurant buy-outs. The minimum number of diners can differ, but typically ranges between 6-8 people. An auto-grat often ensures servers earn a set amount to avoid getting short-changed, especially if the bill gets split up between guests. 

Note: The Internal Revenue Service (IRS) considers auto-grat to be both revenue and a service charge, not a tip, so it’s up to you to stay compliant with your state’s tax reporting laws. 

• Offsetting your team’s wages. The federal minimum cash wage for servers is low, at just $2.13 per hour, so tips are supposed to bring a server’s wage up to $7.25 per hour at the combined minimum rate. However, if those tips don’t come in as expected due to consumer tipping fatigue or any other reason, some restaurants opt to add a service charge to compensate for that potential loss. 

As the business owner, it’s your responsibility to make up the wage difference when distributing payroll, so including a mandatory service charge benefits everyone.

• Compensating for worker expenses, such as health benefits, training time, paid time off, parental leave, and professional development. 

Discretionary service charges.

These charges are optional for customers, and are often presented when diners make a reservation or by the server once the party is seated. In order to include a discretionary service charge, you need a guest’s explicit consent. Otherwise, you’ll have some angry customers on your hands, which could lead to damaging online reviews. 

Here are some examples:

• In some fine dining restaurants, you can add a corkage or bottle fee when customers bring their own bottles of wine. This is often an extra $10 to $40 per bottle and compensates for the labor and cost involved in wine accommodations, like lost revenue and use of the space. An easy way for guests to avoid this charge is to just enjoy the wine on offer. 
• Sometimes restaurants will tack on an extra charge when guests dine during Christmas, New Years, or any other holiday to help compensate for workers’ holiday pay, but guests should have the option to waive this fee.
• In-house delivery fees are a great way to cover the cost of delivery drivers and gas, but customers appreciate it when they’re optional.
• Charging customers extra to cover some of your restaurant’s operational fees may be a business-savvy move, but it must always be communicated clearly and up to the discretion of the guest. 

Third-party delivery app service charges.

When using a delivery service like Uber Eats or DoorDash, both restaurant owners and customers may be subject to various fees that cover: 

• Delivery and driver costs
• Platform operational expenses
• Credit card transaction fees

What is a tip?

Comparing a service charge vs tip, customers are far more used to the latter. Tipping culture has been ingrained in the American restaurant biz for a long time, so it should be no surprise when your bill comes with an option to tip your server. But the definition of a tip may not be as familiar. 

The IRS defines a tip as “discretionary (optional or extra) payments determined by a customer that employees receive from customers.” It’s often considered a reward or token of gratitude for great hospitality.

Tips can be given to service workers as cash or charged (credit or debit card) payments. Both are considered income and subject to payroll taxes. 

Service fee vs tip: what’s the difference?

So is a service charge a tip? Short answer, no. Let’s explore how they’re different from each other, and the pros and cons of each.

Service charges can be mandatory or optional, but that money always goes directly to the business owner and is then allocated as they see fit. 

On the other hand, tips are always optional and are required to go directly to service workers. They’re either collected and kept by the main server or split between both FOH and BOH teams in a tip pooling system.

A tip pool is considered a more equitable payment system for restaurant employees. It means that cooks, bussers, and hosts also benefit, and it often improves teamwork and boosts morale.

At a glance, here are the pros and cons for a service charge vs tip:

Do you tip if there’s a service charge?

That’s the big question on every diner’s mind when the check lands on their table. Unfortunately, there’s no one-size-fits-all answer. But we’ve explored some scenarios when you should and shouldn’t tip on top of a service charge to make things a little clearer.

When you should tip:

• If the restaurant explains that the service charge does not compensate team wages.
• If the service charge is low—between 3-10%—which is often an “employee benefits” fee for full-time workers. This may also be labeled as a “dine-in” fee, but such vague language should be accompanied by an explanation.
• If the service charge is optional.
• If you receive outstanding service and feel generous, regardless of a service charge. 

When you shouldn’t tip:

• If your large dining party is charged an automatic gratuity.
• If it’s clear the service charge is going toward workers’ wages and benefits. This may appear on your check with a note like “tip included” and will likely be an extra 18-22%.
• If menu prices are higher to include gratuity. At The Cormorant, a restaurant in Newburyport, Massachusetts, a placard at every table reads: “Wait, no tipping?” Menu items include the cost of labor, goods, and operations, plus a 20% tip.
• If you receive awful service and don’t feel a tip is earned. 

Service charge best practices for restaurants.

When considering a service charge vs tip only approach, consider the pros and cons. If you want to implement service charges in your restaurant, it’s important to first assess why you’re taking this step. Are you looking to provide your team with a competitive wage? Do you need to offset your soaring expenses? 

With a solid plan in place, bring your team into the conversation. Ask how they feel about adding a service charge, since it affects their working environment and take-home pay. The most important aspects of implementation are consistency, transparency, and showing respect for your employees and customers. 

Remember: communication is key—with both your workers and your guests. 

Create a standard service charge model.

Set a predetermined fee for every service and stick to it. This might be a $3 delivery charge or an 18% auto-grat for groups of 6 people or more. Bottom line: ensure every customer is charged equally and fairly.

Clearly communicate service charges to customers.

This will be the difference between a smooth, enjoyable experience for guests and one rife with confusion and upset. We recommend including an explanation about what the service charge is and what it covers in the following ways:

• On your website
• On your social media pages
• On a placard at each table
• On the front page of the menu
• By the host or server as soon as guests arrive

The most important distinction to make upfront is whether the service charge replaces the tip or not. This will protect your customer-facing team when the check comes and clearly set expectations for diners. 

Train your team. 

It’s your responsibility to ensure your entire FOH team understands how to clearly communicate service charges to guests. Give proper training on how to appropriately respond to guests’ questions about these charges. That way, you’ll avoid awkward situations and improve the dining experience for everyone. 

Go above and beyond when providing service.

Including a service charge will make your guests’ expectations for stellar service much higher. The best way to justify the extra fee? Provide diners with an outstanding experience from the moment they walk through your door to when it’s time to pay the bill. 

Understand state laws that govern service charges.

Some states have specific laws about how you can use service charges. It’s vital to understand what you can and can’t do depending on where your restaurant is. 

For example, the Massachusetts Tips Act says service charges must go to FOH workers and may not be shared with the BOH team. But Massachusetts restaurants can implement other administrative fees that can be allocated outside the FOH team. That is, if the employer “provides a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders.”

We recommend restaurant owners consult with local tax experts to ensure compliance with your state’s laws and regulations. 

Take the headache out of managing tips and service fees.

We get it: as a restaurant owner or manager, there’s more than just delicious food on your plate. From payroll, to tip sharing, to managing time off requests, there’s a lot of administrative tasks that fall on your shoulders.

Homebase makes it easier to manage the paperwork side of things—minus the paperwork. The all-in-one app acts as your mini-manager, helping you easily schedule shifts, manage team communication, and yes, even make payroll a breeze. Explore Homebase and see all that it’s capable of to make managing your restaurant easier.