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Tipping concepts

Service Charge

Also called: mandatory service charge, service fee

A non-voluntary fee added to a customer's bill by the business — legally treated as wages, not tips, even if the business gives some or all of it to staff.

A service charge is a mandatory fee the business adds to the customer's bill (typically 18–22% on large parties, banquets, or as a flat percentage at some establishments). Despite often being framed as "gratuity," the IRS and Department of Labor classify service charges as wages — not tips.

The implications:

  • Tax treatment: service charge income paid to a worker is reported on their W-2 as wages (Box 1), not tips (Box 7). It's subject to FICA withholding by the employer, who pays the employer half.
  • Tip credit: a service charge cannot count toward the tip credit. If an employer is paying $2.13/hr direct wage, service charges don't help meet the minimum-wage floor.
  • Overtime calculation: service charges are included in the regular rate of pay used to compute overtime. Tips are not.
  • Who keeps it: the employer is legally free to distribute service charges however they wish, including keeping them. This is the opposite of tips, which must go to workers.

Customer-facing: if a "service charge" appears on the bill, customers should know it's not necessarily reaching their server, and additional tipping may still be appropriate (or not) depending on what the receipt indicates.