What Is 20 Percent Gratuity? And How Does It Work?

Understanding the Concept of Gratuity

Gratuity, often referred to as a tip, represents a sum of money voluntarily offered by a customer to a service provider. This payment is made in addition to the established price of a service, serving as an expression of appreciation for the service rendered. Historically, tipping emerged in Europe and was introduced to the United States in the mid-1800s, initially by wealthy Americans mimicking European customs. The practice gained traction post-Civil War, particularly in the hospitality sector, where it became a significant component of service workers’ income.

Gratuity’s primary purpose from a customer’s viewpoint is to acknowledge good service, while for service professionals, it often forms a substantial part of their earnings. For businesses, a well-implemented gratuity system can incentivize staff to deliver exceptional service, contributing to customer satisfaction and employee retention. The “20 percent” in “20 percent gratuity” refers to a common proportion of the total bill that customers often consider appropriate for satisfactory service in many industries.

Calculating 20 Percent Gratuity

Calculating a 20 percent gratuity is typically based on the pre-tax amount of the bill, rather than the total including sales tax. The reasoning behind this is that the service provider’s effort is tied to the cost of the goods or services provided, not the government-imposed tax. Including tax in the gratuity calculation would mean tipping on an amount that does not directly reflect the service quality.

To determine a 20 percent tip, one common method involves first finding 10 percent of the bill. This can be done by simply moving the decimal point one place to the left on the total pre-tax amount. For example, if a pre-tax bill is $75.00, 10 percent would be $7.50. Doubling this 10 percent figure then yields the 20 percent gratuity; in this example, $7.50 multiplied by two equals $15.00.

Common Scenarios for 20 Percent Gratuity

A 20 percent gratuity has become a widely accepted standard in various service-oriented industries across the United States. This expectation is particularly prevalent in restaurant dining, especially for tables receiving good service or for larger groups. The general consensus suggests that 20 percent is appropriate for satisfactory service, while lesser percentages might indicate dissatisfaction and higher percentages are reserved for exceptional service.

Beyond restaurants, a 20 percent gratuity is commonly applied in other personal service settings. These include hair salons, barbershops, and nail salons, where the service is directly provided by an individual. Similarly, for transportation services like taxis or rideshares, and for hotel staff providing services such as bell assistance or room service, a 20 percent tip is often customary.

Automatic Gratuity Versus Optional Tipping

The distinction between automatic gratuity and optional tipping is primarily rooted in their voluntary nature and tax treatment. Optional tipping is a discretionary payment from the customer directly to the service staff. This payment is typically based on the perceived quality of service and is considered the property of the employee for tax purposes, requiring them to report it as tip income.

Conversely, automatic gratuity, often labeled as a “service charge,” is a mandatory fee added by the establishment to a customer’s bill. This charge is usually applied in specific situations, such as large dining parties, banquets, or certain events. The Internal Revenue Service (IRS) classifies automatic gratuities as service charges, treating them as regular wages for employees rather than tips. This means the business owns the income from these charges and must process them through payroll, subject to standard employment taxes before distributing them to employees. Businesses are typically required to disclose automatic gratuity policies in advance.