What Is Gratuity on a Restaurant Bill?

Gratuity on a restaurant bill is an additional payment beyond the cost of food and beverages, often included or suggested to acknowledge service. This long-standing custom helps clarify its role in the dining experience. Diners should understand how these charges are presented and what they signify for the restaurant and its staff.

Understanding Gratuity and Tipping

Gratuity, commonly known as a tip, is a voluntary sum a customer gives to a service employee to recognize service quality. Its primary purpose is to reward good service and supplement staff income, as many employees rely on these additional earnings due to lower base wages.

Customers typically calculate gratuity as a percentage of the total bill, before taxes and other fees. A common expectation in many establishments is between 15% and 20% for satisfactory service, with 20% often considered standard. This amount is left to the customer’s discretion, appearing as a blank line or with suggested percentages on the bill.

Automatic Gratuity and Service Charges

Restaurants sometimes apply charges to a bill without the customer’s direct discretion. Automatic gratuity is a mandatory charge typically added for specific circumstances, such as large dining parties, often for six or more guests, or for private events. These charges commonly range from 15% to 20% of the total bill.

The Internal Revenue Service (IRS) classifies these mandatory automatic gratuities as “service charges” rather than “tips.” This distinction is based on whether the customer has the unrestricted right to determine the amount and whether the payment is made free from compulsion. As a result, automatic gratuities are treated as non-tip wages. This means they are subject to income tax withholding and payroll taxes, including Social Security and Medicare taxes (FICA), for both the employee and the employer.

A general “service charge” is a separate mandatory fee added by a restaurant to cover various operational costs. These costs can include health benefits for employees, kitchen wages, administrative fees, or general overhead. Unlike discretionary tips or even automatic gratuities (now classified as service charges by the IRS), these general service charges are retained by the restaurant and are not necessarily distributed to individual staff members as tips. Restaurants should clearly label these charges on the bill, and customers should ask for clarification if they are unsure about the nature of a specific charge.

How Gratuity is Distributed

After a customer pays a gratuity, the money collected is often aggregated and then distributed among various staff members through a practice known as “tip pooling” or “tip sharing.” This system aims to ensure that all employees who contribute to the dining experience receive a portion of the tips.

Employees who commonly receive a share of gratuities include servers, bussers, bartenders, and hosts. Kitchen staff may also participate in the tip pool. Managers and restaurant owners are generally prohibited from participating in tip pools. Distribution formulas can be based on factors such as percentages, hours worked, or a point system.

Both discretionary tips and automatic gratuities, which are treated as non-tip wages, are considered taxable income to the employee. Employees are responsible for reporting their tip income to their employer. The employer then withholds the appropriate income taxes, Social Security, and Medicare taxes from the employee’s wages, fulfilling their tax obligations.