What Is the Service Charge on a Restaurant Bill?

A service charge is a fee added to restaurant bills, often leading to confusion. This article explains its nature, purpose, and implications for consumers.

Understanding the Service Charge

A service charge is a mandatory, predetermined fee that a restaurant adds to a customer’s bill. Unlike a voluntary tip, a service charge is compulsory. It typically ranges from 10% to 22% of the total bill. This fixed percentage fee is clearly stated, often on the menu or by staff, before ordering.

The Internal Revenue Service (IRS) distinguishes service charges from tips based on criteria like compulsion, customer discretion, and employer policy. Service charges are considered the restaurant’s property and business income, whereas tips belong to employees. Restaurants implement service charges to cover operational costs, such as staff wages, administrative expenses, or to ensure a stable income for all employees.

When Service Charges Apply

Service charges are commonly applied in specific dining scenarios. They are frequently added for large dining parties (e.g., six or more guests) and special events like banquets or catering. Some fine dining establishments or those with international dining customs may also routinely include a service charge. The practice has become more prevalent since the pandemic as restaurants seek to offset rising labor and operational costs.

Restaurants typically communicate service charges through various methods to ensure transparency. This disclosure can be found on menus, through signage, or verbally by staff. Providing clear information upfront helps manage expectations and complies with consumer protection principles. California, for example, requires clear display of service fees and their purpose.

Distribution of Service Charges

The allocation of funds collected from service charges can vary significantly among restaurants. Unlike tips, which legally belong to employees, service charges are initially considered the property of the restaurant. The restaurant then has discretion over how these funds are distributed, subject to federal and state labor and tax laws.

Some restaurants may retain the entire service charge as business income to cover overhead costs, while others distribute a portion or all of it among staff. When distributed to employees, service charges are treated as non-tip wages and are subject to payroll taxes, including Social Security, Medicare, and federal income tax withholding. This differs from tips, which employees typically report as income. Distribution to staff can occur through pooling, where the total service charge is divided among employees based on factors such as hours worked or job role, potentially benefiting all staff.

Consumer Considerations

When encountering a service charge, consumers have several considerations. If questions arise, politely ask restaurant staff for clarification. Understanding the restaurant’s policy and distribution helps clarify the bill.

Deciding whether to leave an additional tip beyond a service charge is personal. Some restaurants may intend the service charge to cover all gratuities, while others might still expect additional tipping for exceptional service. Check the bill carefully for any pre-applied charges to avoid double-tipping. Awareness of these practices allows diners to make informed decisions about their overall payment.