The restaurant industry has been facing many challenges since the COVID-19 pandemic. Restaurant owners all over America had to take dramatic steps to try and keep their doors open, with an estimated 72,700 more restaurants closing in 2020 than average — and even more closing since.
Some restaurateurs started charging their customers a service fee to cover additional costs and attempt to prevent further losses. But what is a service charge in a restaurant?
Keep reading to learn the difference between a tip and a service charge, the benefits of a service charge for restaurant owners, and how you can implement a service fee in your restaurant or other food business.
A service charge — also known as a service fee — is an extra charge added to a customer’s bill to cover additional costs not included in the purchase price of the goods the customer is buying.
Service charges are standard in various industries. You might have paid your bank a service charge when withdrawing cash from an ATM or sending a wire transfer. Or you may have paid your airline a service fee to select your preferred flight seat. If you live in an apartment building, you might pay a monthly or yearly service charge to cover cleaning and maintenance in common areas.
In short, a service fee is an additional payment made to a business on top of the cost of the goods or services.
Restaurant service charges are similar to other service fees, as they are non-discretionary (i.e., mandatory) surcharges added to the restaurant bill. It’s usually calculated as a percentage of the total bill. For example, if the total check amount was $50 and a restaurant charged a 10% service fee, the bill would have an additional $5 to cover service costs.
But what is a service charge in a restaurant for?
A restaurant service fee might cover staff expenses, such as hiring and training. It could also subsidize credit card fees or help cover the costs of a point-of-sale (POS) system. Some restaurateurs charge a service fee to provide additional benefits like health insurance to their staff — for example, in San Francisco, a government mandate allows restaurants to charge customers an extra fee to cover their staff’s healthcare.
Many restaurants offering delivery also charge a service fee to cover their delivery costs and any other expenses associated with this service.
Also known as a gratuity, a tip is a voluntary payment made by a customer to thank service staff for good service.
Tips are usually paid directly to the waitstaff as a thank you for their hard work. On the other hand, some restaurant managers request that servers contribute all gratuities to a tip pool, which is then shared among other staffers. This means it’s not only front-of-house staffers like waitstaff and bartenders who get a share in the tips. Back-of-house workers (like dishwashers, bussers, and other kitchen staff) also get a cut.
Tips are often essential to a restaurant worker’s earnings and can turn the minimum wage into a real living wage. The federal minimum wage for workers who are eligible for tips is only $2.13 per hour. It would be almost impossible to live on such a low hourly wage; the extra income earned through tips is essential to cover living expenses.
The main difference between a tip and a service fee is that tips are voluntary payments, while service charges are mandatory. Additionally, tips are paid to the restaurant staff as a thank-you and to supplement their wages. In contrast, service fees tend to go to the restaurant as a business (even if this money may then pay for staff benefits).
Gratuities are also reported differently to the Internal Revenue Service (IRS). In most American states, tips or gratuities are not subject to sales tax, while a service charge is. If you’re a restaurant owner or worker, it’s worth checking local regulations to ensure you report all income accurately.
Some restaurants add an “automatic gratuity” to their checks — either in addition to or instead of a service fee. However, it’s important to note that an automatic gratuity is not the same as a service charge.
An automatic gratuity is a tip that’s added to the check automatically. Although listed on the restaurant bill, it’s not a mandatory payment and can be removed if the customer chooses not to pay it.
Automatic gratuities are often applied to checks of large parties to ensure the serving staff are sufficiently compensated for their service. Big tables often want to split checks, which can cause more work for servers; by adding an automatic gratuity to the bill for tables of eight or more, restaurant managers make it more likely for their staffers to be tipped appropriately.
Automatic gratuities also save customers from having to calculate the proper amount to tip — it’s a win-win.
If you’re considering implementing a service charge, you might be wondering: What is a service charge in a restaurant good for? Can’t I just raise my menu prices to cover additional costs?
The short answer to that question is “yes.” It’s possible to raise your prices to cover your service costs — and some customers might prefer it. It’s not unheard of for customers to question or dispute a service charge when it appears on their restaurant check.
However, increasing your prices means you’ll likely be increasing the earnings gap between your FOH and BOH teams. If your customers pay an average tip of 20% on each order, by raising your prices, the amount of gratuity your FOH team earns will also go up (unless you use a tip pool).
Many restaurateurs choose to implement a dedicated service charge instead. It lets them cover any additional costs relating to their restaurant operations. You could use a service charge to pay for credit card processing fees, POS hardware, self-service kiosk software, or other expenses. Alternatively, you can use it to pay for healthcare or other employee benefits. Just bear in mind that different states and territories have different regulations regarding service charges. Always check and abide by local laws.
If you choose to charge a service fee, it’s important to communicate it clearly with your customers; nobody wants to be surprised by an extra charge on their check. Add a sentence to your restaurant menu terms and conditions stating how much your service charge is and what it pays for — something like: “Please note, we charge a service charge of 10% for all diners.”
If you run a self-service restaurant, KioskBuddy lets you add a service fee and customize how it appears on your kiosk. Use this feature to explain the service fee and ensure customers know what they need to pay before they pay it.
Adding a service charge to your restaurant’s operating procedures doesn’t have to be tricky. Check local and state laws to ensure you’re permitted to add a service fee, then add a disclaimer to your menu and printed check to let customers know what the charge is for.
KioskBuddy lets you implement a service charge on your self-ordering kiosks quickly and easily. You can choose whether you want to set a flat fee (e.g., $0.99 per order) or a percentage of each order. You can also keep the service fee separate from your Square processing fees. In addition, it’s possible to customize the appearance of your service fee and write your own wording to explain the extra expense.
Download KioskBuddy today and enjoy a 30-day free trial.