Service Charge vs. Gratuity Charge

Anyone who enjoys a meal at a restaurant or stays in a hotel is likely to confront the question of what gratuity to give to service professionals such as waiters, bartenders, porters and maids. According to "USA Today", some American hotels and restaurants are transitioning from the traditional tip system to a service charge system, which is more common in Europe. However, this only increases the need to understand the difference between these two forms of payment.



A gratuity is a voluntary payment that customers may make to service professionals. Gratuities are usually expressions of appreciation for exceptional service, though some customers give intentionally small gratuities as a means of showing their displeasure. A service charge is similar to a gratuity only in the sense that it is also an additional payment in a situation involving a service professional. However, service charges are mandatory rather than optional, and may or may not deliver additional pay to the service professional who works for the customer.


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Labor Laws

Some state's labor laws address the difference between service charges and gratuities, or tips. This occurs when a state allows certain employers to take a credit for workers who earn the minimum wage or pay workers less than the state or federal minimum wage. The result is that service workers who earn tips may not be eligible for minimum wage protection. If employers collect service charges, they may not claim tip credits or pay their workers less than the minimum wage, even if they deliver the service charge earnings to workers as supplemental pay. Labor laws also require employers to deliver credit card gratuities to service professions within one pay period.


Tax Issues

Tax codes also deal with gratuities and service charges. According to the Internal Revenue Service, workers who earn tips must report them to their employers, who are responsible for withholding taxes from gratuities as well as regular wages. Service workers must then report their income from tips as part of their taxable income on year-end tax returns. Workers only pay taxes on service charges if and when they receive them as payment, which occurs when an employer distributes service charge income to service workers at the end of a day, week or pay period.



The differences between service charges and gratuities matter to customers as well as business owners and service workers. Except for restaurants, where customers can add gratuities to their bills, most gratuities are paid in cash, which requires customers to travel with small bills to provide tips as needed. Service charges eliminate the need to carry cash, as well as the need to compute an appropriate gratuity on the spot. However, service charges remove the opportunity for a customer to recognize poor of excellent service by changing the amount.


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