Service Charge vs. Tip: What’s the Difference?

Your guests are likely accustomed to tipping servers at your restaurant, but are they familiar with service charges? The distinction between a service charge vs. tip matters – and here’s why. 

Costs are rising for everyone, including you, your staff, and your diners. Finding the right business model for your restaurant while ensuring your customers are happy can feel like a balancing act. Equipping yourself with the information you need to make this kind of business decision is critical.

In this guide to a service charge vs. tip, we’ll answer these key questions:

• What is a service charge?
• Is a service charge legal?
• Why do restaurants charge a service fee?
• Service charge vs. tip: what’s the difference?
• Do you tip on top of a service charge?
• How can restaurants implement service charges?

What is a Service Charge?

A service charge is a fee that businesses add to an invoice or bill that’s typically intended to cover the cost of completing the transaction. For instance, if you’ve ever switched internet providers, you’ve likely paid your new provider a service fee to cover the initial setup.

Consumers tend to have mixed feelings about service charges, which some have called “junk fees.” Unexpected fees or charges that aren’t communicated clearly are often the crux of the problem. We’ll explore how to avoid this issue later in the article.

What is a Service Charge at a Restaurant?

Service fees at restaurants are charges included on a guest’s bill to cover costs associated with the meal. For instance, restaurant service charges might cover:

• Automatic gratuities of 18% or upward for parties of six or more
• Holiday service fees added during busy seasons to cover increased labor costs
• Charges for reservations canceled at the last minute during peak times
• Takeout and delivery fees to cover packaging and transportation costs
• Cleaning charges added for parties booking private events at the restaurant
• Bottle service fees added to purchases of entire bottles of alcohol at nightclubs
• Specialty ingredient charges added to specific menu item purchases

Are Service Charges Legal?

The law governing service charges varies by state. For example, California recently passed a law that bans unadvertised service fees, surcharges, and other additional costs included on a bill for meals or delivery service.

Connecticut also introduced a bill in 2024 to require fee disclosures for consumer goods and services, including food and beverages. The state’s Governor and Attorney General support the bill, indicating that it’s likely to become law.

In addition, in 2023, U.S. Congress introduced the Junk Fee Prevention Act. The act is aimed at requiring businesses to “clearly and conspicuously display” the total price of advertised goods or services, including any mandatory fees, at the moment they’re first presented to consumers. If the act becomes a law, it would grant the Federal Trade Commission the authority to create rules ensuring transparent communication around service fees. 

Why Do Restaurants Charge a Service Fee?

We’ve shared a few examples of situations in which restaurants might charge a service fee. But what’s really driving the practice?  

As a restaurateur, you’ve likely seen firsthand the impact of rising food and labor costs. In the last four years in America, food costs for the average restaurant have spiked by 29% and labor costs by 31%, according to the National Restaurant Association. It’s no surprise that TouchBistro’s 2025 State of Restaurants Report found that operators cited high food and inventory costs as their number one source of financial strain. 

In addition, 64% of restaurants surveyed in our report are offering higher wages to stay competitive. While this move often necessary from a recruitment standpoint, it can make healthy profits more difficult to achieve – which supports the reasoning for implementing service fees.

Service Charge vs. Tip: What’s the Difference?

Now that you’re clear on the basics of a service charge, you may have new questions. How does tipping factor into the mix? Is a gratuity the same as a tip? If not, what is a service charge vs. tip? The two are indeed different – let’s clarify each.

First, service charges are mandatory fees set by the restaurant. In contrast, tipping is optional and how much you should tip at a restaurant is up to the customer, depending on the amount the diner wants to give to the server based on the service. This is the main difference between a restaurant service charge vs. tip. 

Second, the funds received from service charges go directly to the restaurant, while tips belong to the server who received them. However, many restaurants require servers to share a set percentage of their tips with bar and kitchen staff (a process known as tip pooling or tipping out).

Beyond asking, what is a service charge vs. tip?, in the U.S., it’s also important to understand the tipped minimum wage. This is an hourly pay rate for employees who receive tips on a regular basis, which is generally lower than the standard minimum wage. 

Currently, the U.S. federal government requires tipped employees be paid at least $2.13 per hour in direct wages, as long as this amount equals the federal hourly minimum wage when combined with tips. If it doesn’t, the employer must make up the difference.

Is a Gratuity the Same as a Tip?

Let’s dig deeper on the concept of a tip vs. service charge. Not all gratuities are true tips in the eyes of the law. 

For instance, an auto gratuity is considered a service charge rather than a tip, according to the US Internal Revenue Service (IRS). This is because the payment is mandatory and the customer doesn’t have the option to determine the amount of the gratuity – two crucial factors in the IRS’ distinction between service charges and tips. 

These four factors, in the words of the IRS, are:

• The payment must be made free from compulsion 
• The customer must have the unrestricted right to determine the amount
• The payment should not be the subject of negotiation or dictated by employer policy
• Generally, the customer has the right to determine who receives the payment

Pros and Cons of Service Charges vs. Tips

Now that the legalese is out of the way and you know the difference between a restaurant service charge vs. tip, here’s the real question. When it comes to tips vs. service charges, which is best for your restaurant? 

The answer will depend on your specific circumstances. It’s helpful to look at the pros and cons of each, then decide for yourself.

Do You Tip on Top of a Service Charge?

The short answer is yes, guests should still tip on top of service fees at restaurants because these fees often aren’t meant to replace tips.

One primary reason to tip on top of a service charge is because the tip will go directly to the server, while the service charge will go to the restaurant – and may or may not be partially paid out to the server. Additionally, when guests tip based on the quality of service they receive, this incentives servers to continue upping their game. As a result, it benefits everyone.

One exception is the case of the auto gratuity. If this fee is added to a customer’s bill, they shouldn’t be expected to tip more on top of it.

How to Implement a Service Charge at Your Restaurant

Ready to add a service charge to your operations? First, consider which kind of fee structure you’d like to implement. Here are a few options:

• Percentage-based service charge: This could be an 18% auto gratuity that you add to every bill for parties of eight or more guests, or during special events. Be sure to clearly communicate it on the bill (or even earlier, at the time the reservation is made), and emphasize that customers don’t need to tip on top of this charge.
• Flat rate service charge: This model could look like a $5 service fee added to every bill above $25 to cover food and labor costs. List it on your menu as well as on the bill. 
• Variable service charge: This tiered structure could be based on the total bill amount. For instance, you might charge 15% for bills under $50, 18% for bills between $50-$100, and 20% for bills over $100. It’s a good idea to list all tiers on the menu and explain the service charge to guests at the host desk when they enter the restaurant.
• Takeout or delivery service charge: This could be a small fee, such as $2 added to all takeout orders, to cover packaging and/or transportation costs. List it on your menu as well as during the takeout ordering process.

Keep in mind that your choice of service charge model should consider whether you run a full-service dine-in restaurant vs. a quick-service or takeout-only venue. For instance, an 18% auto gratuity likely makes more sense for the former, where servers spend more time interacting with guests.

Tips for Smooth Service Charge Implementation

• Be transparent: Don’t just list the service charge in one place. Clearly communicate it on your website, menus, and during service.
• Educate your staff: Ensure that front-of-house employees understand the purpose of the service charge and can explain it to customers if questions arise.
• Incorporate guest feedback: Consider gathering customer feedback on service charges to understand how they perceive these fees and identify opportunities to adjust your approach.
• Highlight the value: Emphasize the benefits of the charge, such as higher staff wages or improved ingredient quality.

You now know the basics of what service charges are and why restaurants include these fees on customers’ bills. We’ve cleared up the difference between a service charge vs. a tip and explained why guests should still tip on top of service charges. 

Plus, you’ve got a few ideas for how to implement a service charge at your restaurant in a way that works for everyone. Here’s to your continued growth and customer satisfaction!

by Katherine Pendrill

Katherine is the Content Marketing Manager at TouchBistro, where she writes about trending topics in food and restaurants. The opposite of a picky eater, she’ll try (almost) anything at least once. Whether it’s chowing down on camel burgers in Morocco or snacking on octopus dumplings in Japan, she’s always up for new food experiences.

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Labor Payments