Top Things You Need to Know about Service Charges vs. Tips

A service charge is a fee collected to pay for expenses linked to the primary product or service being purchased. The charge is often added at the time of the transaction.  

Many industries, such as restaurants, banks, and travel and tourism, collect service fees. When collected, these fees may cover services provided to the consumer as well as administrative or processing costs.  

Service charges are made directly to the company. They differ from tips, which are paid to the employee who offers the service. The consumer decides how much to tip.  

Types of Service Charges

1) Hospitality Industry  

Most hotels and restaurants in the United States charge a service fee that is a percentage of the total bill, which is sometimes used rather than tipping. Service charges include the delivery fee charged for ordering room service at a hotel and the gratuity added to the bill for a large group dining at a restaurant. If the total amount for an order is $250 and the gratuity is listed as 18%, the total bill to be paid is $250 + (18% x $250) = $295.  

2) Banking Industry  

The banking business levies a variety of service fees, which are usually fixed at a flat, standard rate. When you open a checking or savings account with a bank, you pay a monthly maintenance fee. The cost is deducted from the account at the end of the month. Banks also charge service fees for utilizing a competitive bank's ATM or starting a wire transfer.  

3) The travel industry  

Airlines collect a variety of service fees, including checked or large baggage fees, change or cancellation fees, early seat selection fees, and inflight experience fees for Wi-Fi, food, beverage, and entertainment.  

An airport improvement fee, sometimes known as an embarkation fee, is a service tax charged for departing and connecting passengers at airports. It is imposed by the government or an airport management organization, and the revenues are typically used to support major airport improvements or the growth of airport services.  

Depending on the location, the airport improvement fee is included in the cost of a traveler's airline ticket, in which case the airline will pass the fee to the appropriate agency. However, in other locations, fees must be paid at the point of embarkation.  

4) Residential Property 

Certain types of residential properties can be subjected to a monthly service charge when rented or leased. For example, a condo tenant may be asked to pay a condo fee in addition to their rent. The condo fee covers general building cleaning and maintenance.  

Online rental sites that connect renters with property owners, such as Airbnb, charge service fees to cover reservation fees. The service charge is usually determined as a percentage of the subtotal and applies to both renters and owners.  

What Is The Service Charge At A Restaurant?

In the food service industry, service charges are also becoming more popular. Restaurant operators may opt to add a service charge to a bill for several reasons, including but not limited to:  

For large parties, such as those with more than eight guests, an automatic gratuity is applied. These are usually about 18% of the entire bill.  

A bottle service charge at a bar or nightclub. This fee varies widely depending on the club's location and level of exclusivity.  

A hotel restaurant's room service charge is usually 15% of the entire bill, however it may also contain flat rate fees.  

 A delivery fee is required for online delivery orders, such as pizza delivery. This is normally between $2 and $5 and is not the same as a tip because it is not given to the driver.  

A banquet event fee or catering service fee for large-scale catered events. This ranges from 18 to 25%, depending on the size, nature, and location of the event.  

 A service charge goes directly to the restaurant or business, and they can spend that money as they see fit. Unlike tips, service charges do not always go straight to the employee who served you. They are considered non-tip wages and must be paid as part of the bill, as opposed to optional tips. 

Service Charges vs. Tips


Money given to someone willingly as a reward for their services. Tips are voluntary (or extra) rewards made by clients to professionals at their own discretion. The gratuity refers to the tip. We are not compelled, in other words, to pay the employee a small sum of money. If the consumer hands over the gratuity, it is considered the employee's property. 

According to the IRS, tips include:  

  1. Cash tips are directly received from clients.  
  2. Customer tips are included as part of an electronic settlement or payment. This category includes credit cards, debit cards, gift cards, and other electronic payment methods.  
  3. Tips from other employees are collected and dispersed via tip pools, tip splits, or other formal or informal tip-sharing agreements.  
  4. The worth of non-cash tips, such as tickets or other valued items.  
  5. We offer tips to employees because we want to show gratitude to them alone, not to everyone else. Some business owners try to employ all of these strategies to increase their profits.  

Generally, a payment qualifies as a tip if it fits the following criteria:  

  1. Payment must be voluntary.  
  2. The quantity must be selected by the customer without limitation.
  3. It should not be discussed or determined by employer policy, and  
  4. In most cases, the consumer should choose the recipient of the payment. 

Forms of Tips

There are two kinds of tips: cash and non-cash tips.  

1) Cash tips  

Cash tips are amounts of money given to a service provider by a client, whether in the form of actual cash or credit/debit card charges. Cash tips also include money given by other staff members as part of a tip-sharing agreement. Hostesses, bussers, and service bartenders, for example, are frequently compensated with waiters' and waitresses' tips. 

“Directly tipped employees" are workers who get tips directly from consumers. “Indirectly tipped employees" are those who get tips from other employees, such as the hostesses, bussers, and service bartenders in the example above.  

2) Non-cash tips  

Non-cash tips include passes and tickets, as well as additional products and commodities.  

How Much Are They Worth?

There is no precise answer to how much you could make in tips because each customer leaves a different amount. There is universal agreement that 10% of the bill should be left as a tip (this is the minimum expected in the United States, for example), however, tips can be anywhere from more to less than this. 

Difference Between Tips and Service Charges

What distinguishes service fees from tips? Service fees are listed as “discretionary" or “compulsory" on food bills. This is how they diverge.  

• Compulsory service charge: The customer Must be notified before ordering. Only when the consumer receives poor service can they refuse to pay.  

• Discretionary service charge: This fee may be added to the bill receipt at the end of the meal, but the client is free to decline it.  

A service fee is a tip for service that is added to a customer's bill as an optional or compulsory additional expense. A discretionary service charge is added to the client's bill at the end of the service; however, the customer may refuse to pay for a variety of reasons, including dissatisfaction or laziness. 

A mandatory service charge is exactly that: mandatory, and as such, it must be declared upfront before the service starts. If the service is poor, it is the only excuse for failing to pay the mandatory service charge.  

Without a doubt, a decent wage should be accompanied by good service. It might be offered as a tip. However, unlike other service costs, tipping is optional. A tip is something you offer from the heart to convey your gratitude, whereas a service charge is typically initiated by the business owner.  

Final thoughts: service charge vs. tip

You know that service charges and tips are not interchangeable. While service costs are fixed and mandatory payments, tips are optional.   

However, both are taxable.