Service Charge vs Tip: What Is the Difference?

Short answer: A tip is a voluntary amount the customer chooses to give. A service charge is a mandatory fee the business sets, such as an automatic 18% for large parties. For tax purposes the IRS treats service charges paid to employees as regular wages, not tips. Under the FLSA, tips belong to employees, while a service charge belongs to the business unless it chooses to pass it on.

Restaurant bill showing a service charge line — Voluntary tip or mandatory charge: the difference matters.

The IRS test for a tip

A payment is generally a tip only if all of these are true:

The customer pays it voluntarily.
The customer decides the amount.
The amount is not set by the business’s policy or negotiated.
The customer generally decides who receives it.

An automatic charge fails this test, so it is a service charge.

Service charge vs tip at a glance

	Tip	Service charge
Who decides	Customer	Business
Who owns it (FLSA)	Employees	Business
Paid to staff as	Tips	Wages, if the business distributes it
Counts toward the tip credit	Yes	No
Federal tips deduction	Can qualify	Does not qualify

Read about the new deduction in no tax on tips and overtime.

Why restaurants add service charges

To pay kitchen staff more evenly.
To set predictable pay for large parties and events.
To fund higher base wages.

Tell customers clearly

Show the service charge on the menu and the bill, and say where it goes. Some states have disclosure rules; for example, Hawaii requires businesses to disclose when a service charge is not paid entirely to employees. This is general information, not legal advice.

Pay service charges and tips by hours

Whether you distribute service charges or pool tips, hours worked are the fairest base. EZTime uses clock-in data for shares, and see the restaurant tip-out guide.

Frequently asked questions

Is a service charge a tip?

No. A mandatory charge set by the business is a service charge, not a tip.

Do servers get the service charge?

Only if the business chooses to distribute it; then it is paid as wages.

Is an automatic gratuity a tip?

Usually no. If the customer cannot choose the amount, the IRS treats it as a service charge.

Distribute tips and service charges by hours worked. Start your 14-day trial or book a demo.

Updated November 2026. General information only; not legal or tax advice.