CashoutGlossary / Service charge
Service charge
A required charge a business adds to the bill. It's not a tip under federal law, and any part paid to you is wages, not tip income.
A service charge is an amount the business puts on the bill that the customer has to pay, such as a set percent for a banquet or a large party. Because the customer doesn't choose it, it isn't a tip. The DOL's example is a compulsory charge of 15 percent of the bill: not a tip, even if the employer hands it out to staff.
- Taxes. Service charges paid to you are wages, not tips. They go through payroll, and the IRS says not to put them in your tip record.
- No Tax on Tips. Mandatory service charges aren't qualified tips, even when they're paid out to staff. An amount the customer is expressly told they can change or remove, including to zero, isn't a mandatory amount.
- Wage law. Service charges an employer pays out can count toward its minimum wage duty, and they go into your regular rate for overtime.
State law can be more protective than the federal rule, so check your state's page on the tipped minimum wage hub.
A common mistake is logging a service charge as tips. It inflates your tip record and your tip report, when the employer already counts that money as wages.
Related terms
Auto-gratuity · Tip · Qualified tips · Overtime · Form W-2
