Service Charge: Definition, Types, and Why It’s Not a Tip
Definition
A service charge is a fee added to the cost of a primary product or service to cover services, administrative costs, or processing related to that purchase. It is collected by the business at the time of the transaction and is paid to the company — not directly to an individual employee.
How service charges are used
Service charges help businesses cover costs tied to delivering a product or service. They may be labeled differently depending on industry (service fee, booking fee, maintenance fee, security fee, etc.) and can be applied as flat amounts or percentages of the bill.
Common types by industry
- Hospitality: Hotels and restaurants often add service fees or automatic gratuities (for example, delivery or room-service charges, or mandatory gratuities for large groups). Example: a $250 bill with an 18% gratuity becomes $250 + (0.18 × $250) = $295.
- Banking: Banks impose service charges such as monthly account maintenance fees, ATM fees for out-of-network use, and wire-transfer fees. These are typically flat, recurring charges.
- Travel: Airlines and airports charge fees for checked/oversized baggage, seat selection, changes/cancellations, onboard Wi‑Fi/food, and airport improvement or embarkation fees. Airport improvement fees may be included in the ticket price or collected at the point of departure.
- Residential and short-term rentals: Condo fees and building maintenance charges are common for leased properties. Online rental platforms often charge service fees (usually a percentage of the reservation subtotal) that apply to both renters and hosts.
Service charges vs. tips
- Who receives it:
- Service charge: Paid to the business; distribution among staff is determined by the employer.
- Tip: Given directly to the individual worker as a discretionary reward.
- Control:
- Service charge: Set and required by the business at time of billing.
- Tip: Controlled by the customer and optional.
- Tax and reporting:
- Service charges are treated as business revenue; amounts distributed to employees are reported and taxed as wages.
- Tips are considered income for the worker who receives them and must be reported by that worker for tax purposes.
- Examples classified as service charges (per U.S. tax guidance): automatic gratuities for large parties, banquet fees, certain hotel and cruise charges, and packaged event fees.
Practical notes for consumers and businesses
- Consumers should check receipts to see whether a service charge has been added and whether it is refundable or transferable to staff.
- Businesses should communicate clearly how service charges are used and ensure compliance with tax-reporting rules when service charges are shared with employees.
Key takeaways
- A service charge is a company-imposed fee tied to a purchase and is distinct from a customer tip.
- It appears across many industries (hospitality, banking, travel, residential rentals) and can be flat or percentage-based.
- Legal and tax treatment differs: service charges are business revenue (and wages when distributed), while tips are income for individual workers and reported by the recipients.