Understanding Service Charges for Restaurant Owners

Service charges, a customary practice in numerous industries, have become far more common in the cost-intensive, low-margin restaurant business in recent years.

A service charge is a fee added to a customer’s bill to cover various aspects of service on top of the cost of goods (i.e., food and beverage). Service charges can serve multiple purposes depending on the restaurant’s policies, from supplementing staff wages to offsetting operational costs. 

While service charges are legal, they’re often misunderstood — and somewhat controversial. Diners don’t love being surprised at the end of a meal with an unexpected fee — especially if it’s not clear what the fee is actually for or where it’s going. Many assume it’s a tip (it’s not!), which can negatively impact employees’ take-home pay.

While service charges can be useful for operators who are fighting an uphill battle against inflation or staffing issues, it’s critical to understand exactly what a service charge is (and isn’t), how to implement one, and what to consider when it comes to compliance and reporting. 

What is a service charge in the restaurant industry?

In the restaurant industry, a service charge is a mandatory fee that gets added to a customer’s bill. This fee is typically a fixed percentage of the total bill amount and often ranges from 10% to 20%. 

It’s important to note that a service charge is not a tip or a gratuity, which are voluntary amounts left by customers in appreciation for service provided. Instead, a service charge is a mandatory charge, often used to cover the costs associated with providing the service, such as staff wages, maintenance, or administrative costs. These charges are common practice in many restaurants, particularly in fine dining or restaurants with large numbers of staff. 

As Beth Schroeder of Raines Feldman LLP explained in her recent Hot Tips & Takes interview, the proceeds of service charges are the property of the restaurant to do with as management sees fit.

Service charges for restaurant owners can help to:

  • Compensate for staff expenses: One of the primary reasons many restaurants implement a service charge is to help cover staff salaries and benefits. While tips can often supplement these costs, they are not always reliable and can fluctuate greatly. Service charges provide a more consistent and reliable revenue stream, ensuring that restaurant staff are compensated fairly for their work.
  • Maintain high service standards: Service charges can also be seen as a reflection of the superior service offered by the establishment, as they’re often found in high-end restaurants where exceptional service is part of the dining experience. Funds generated through service charges can be used to invest in training and development programs for the staff, helping to maintain high service standards.
  • Balance food costs and pricing: Implementing a service charge can help balance the cost of high-quality ingredients with competitive pricing for the customers. Restaurants operating in a higher price range often use premium ingredients, and a service charge helps offset these costs without needing to increase menu prices significantly.
  • Share tips equitably among staff: In many establishments, tips are shared among the service staff only. By implementing a service charge, restaurants can ensure a more equitable distribution of tips among all staff members.
  • Offset the cost of bottle service: For restaurants offering bottle service, the associated costs can be substantial. This service often involves premium liquors and additional staff to cater to the table. By applying a service charge, restaurants can help offset these costs.
  • Facilitate large group payments: Service charges are particularly advantageous when catering to large groups or events, such as banquets or parties. A preset service charge can ensure that the staff is equitably compensated for their time and effort and that costs associated with special decorations or other incidentals are covered.
  • Address split meal charges: When large parties dine together and split bills, it creates additional work for service staff. A fixed service charge helps compensate for this increased workload.
  • Accommodate delivery fees: One last case where service charges are common is in covering delivery fees. As food delivery has gotten more popular, restaurants have had to bear the cost of partnering with food delivery platforms. These platforms charge a significant percentage of the order total as their fee. By incorporating a service charge, restaurants can manage these expenses without having to compromise on the price or quality of their food. 

What’s the difference between a service charge and a tip or gratuity?

While this can be confusing to diners, service charges and tips/gratuities are not the same. The key differences between a service charge and a gratuity:

  • Service charges are compulsory. Service charges are mandatory and non-negotiable. Tips, on the other hand, are not required. Yes, they’re often expected — and many hospitality employees rely on them to increase take-home pay — but ultimately, tips are discretionary and generally based on the quality of the meal and service. 
  • Service charges are a set percentage of the bill. A service charge is a fixed percentage of the total cost of a meal as determined by the employer; it generally ranges from 10-20% of the bill. With tips or gratuities, while 15-20% is a customary percentage of the bill, the amount is completely up to the customer.
  • Service charges belong to the employer. Service charges can be used to increase staff wages, but ultimately, it’s the employer’s call as to where those funds go; operators might choose to use a service charge to offset other costs of doing business. Tips, on the other hand, belong solely to employees. Employers can implement tip pools or tip shares to distribute tips more equitably among employees, but it’s illegal for them to keep any portion of tips from any employee. 
  • Service charges are categorized differently by the IRS. When a service charge is used to increase employee compensation, it’s still not considered a tip. It must be reported as a “non-tip” wage.

Tipping on top of service charges

It’s important to understand that tipping is also still typically expected on top of the service fee. 

Again, though a service charge can contribute to the staff’s wages, that’s not always the case. Employers might use service charges for other costs of doing business. When this happens, “service charge” is a bit of a misnomer; that is, customers may (reasonably!) assume that the fee is going to the person or people who provided the service. As a result, customers might be less inclined to leave a tip.

That’s why it’s important for employers to clearly communicate to both customers and employees how the service charge is being used. If it’s unclear, and the charge isn’t being used to increase compensation, it’s likely that employees will miss out on tips. . 

What is an automatic gratuity or auto-gratuity?

Automatic gratuities are service charges, not tips or gratuities. (Confusing, right?)

Automatic gratuities or auto-gratuities are perhaps even more of a misnomer than “service charge” — in fact, some legal professionals advise employers to avoid using the term altogether.

Here again, customers will often assume that their service provider is the recipient of the automatic gratuity (and choose not to leave a tip on top of the auto-grat). Because auto-gratuities are service charges, they belong to the employer. While they can be brought in as non-tip wages for employees, they can also be used for other operating expense.

How service charges impact restaurant employees

Service charges have a significant impact on restaurant employees, affecting their overall income, the perceived value of their work, and job satisfaction. Here are some of the ways service charges influence employees:

  • Income Structure: When paid to the employee, service charges can provide more stable income for employees because they don’t fluctuate like tips.
  • Pay Distribution: When they’re distributed, service charges are usually divided amongst all staff, including non-tipping positions such as cooks and dishwashers. This can lead to a fairer distribution of income.
  • Reduced tip earnings: This may not be problematic if service charges are being paid to the employee. However, as noted above, customers might be less inclined to tip on top of a service charge, which can hurt employees who rely on tips as a significant portion of their wages.
  • Motivation and performance: Given the compulsory nature of service charges, some employees might feel less motivated to provide excellent service, as their earnings are not directly tied to their service quality. On the other hand, it might also alleviate some pressure, allowing employees to focus on providing consistent service without the stress of variable tips.

If a service charge is primarily used for fair wage distribution among employees, it can have significant implications on their wages and tips. This practice can ensure a more equitable wage structure, especially in establishments where behind-the-scenes staff, such as cooks and dishwashers, typically do not receive tips.

Using the service charge for paying employees can bring a sense of fairness and stability to restaurant wage structures, but it also requires clear communication and understanding from both employees and customers to function effectively..

How service charges impact restaurant customers

Service charges offer several benefits to restaurant owners and staff, but also have implications for the customers. These include:

  • Reduced tipping: Customers may believe a service charge is a substitute for a tip and reduce or eliminate their gratuity. Customers may also feel that a mandatory service fee reduces their control over rewarding good service, traditionally reflected through their tip.
  • Surprise costs: Customers unaware of a service charge may be surprised or frustrated when they receive the bill. This could be perceived as hidden costs, which might impact their overall dining experience negatively. 
  • Increased scrutiny of service quality: Knowing that a service charge will be added to their bill, customers might scrutinize the quality of service provided more closely, with customers more likely to be upset  by any small lapse in service.

Potential impacts of service charges highlight the importance of clear communication and excellent service, ensuring customers understand the purpose of the service charge and feel it justifies the quality of their dining experience.

Is implementing a service charge worth it?

Implementation of a service charge can have significant implications for a restaurant’s revenue. From a financial perspective, a service charge can lead to a more predictable revenue stream. Unlike tips, which are subject to variability, service charges are fixed and therefore ensure a consistent addition to the restaurant’s revenue.

However, the success of implementing a service charge largely depends on how it’s perceived by customers and employees. If customers feel that the service charge doesn’t correlate with the quality of service, or if it significantly increases their total bill, they might reconsider their dining choice, potentially leading to a reduction in customer frequency and ultimately affecting the restaurant’s revenue. 

On the other hand, if service charges are used to ensure fair wage distribution and provide a stable income for employees, it can foster a more satisfied and motivated workforce. This can indirectly contribute to the restaurant’s revenue by reducing employee turnover, enhancing service quality and efficiency, and creating a positive dining environment that attracts and retains customers.

How to collect a service charge at your restaurant

The general process for handling service charges is as follows:

    1. Determine how much you will charge: A service charge typically ranges from 10% to 20% of the total bill but can vary based on the restaurant’s specific requirements.
    2. Determine how you will spend the funds: The service charge can either be retained by a restaurant or distributed among employees.
    3. Inform and train staff: Staff should be informed of how the service fees will be used, how it impacts their income, and how it benefits the restaurant. Proper training should be given to employees, particularly those interacting with customers, to effectively communicate the purpose of the service charge and address any customer questions or concerns.
    4. Create clear communication with customers: Customers should be informed about the service charge before they place their order. This can be conveyed through signage at the restaurant, communicated verbally by servers, or noted on menus. 
    5. Implement the charge: Once all of the above steps are completed, you can start levying the service charge on customer bills. This will involve updating your point of sale system and ensuring all staff are trained to handle the new billing system.
    6. Distribute proceeds accordingly: Once you start collecting service charges, proceeds should be distributed to qualified staff members based on your policy. This is something that Kickfin can help with, if you don’t have the ability to cashlessly distribute tips and charges,
    7. Ensure accurate reporting: Follow IRS guidelines for recordkeeping and reporting. When paid to employees, service charges should be treated as non-tip wages and are subject to social security tax, Medicare tax and federal income tax withholding.Employers can’t use these non-tip wages when computing the tip credit available to employers because these amounts aren’t tips.
    8. Monitor and adjust: After implementing a service charge, be sure to monitor its impact on both restaurant revenue and customer satisfaction. Gathering feedback from customers and staff to identify issues or areas of improvement. 

Remember too that it’s crucial that your restaurant remain compliant with local labor and tax laws when implementing a service charge system. This includes understanding how service charges are taxed and how they impact wage calculations. Laws can vary by location, so consult with a legal expert or your local government to clarify any uncertainties and avoid potential legal issues. 

How Kickfin can help

Kickfin offers an efficient and streamlined solution for managing tips in your restaurant. Our platform allows you to easily implement, track, and adjust your tipping system, ensuring a hassle-free experience for both your staff and customers. 

Kickfin is also designed to be compliant with local labor and tax laws, helping you stay within legal bounds when implementing tips for your restaurant. 

To hear more about how Kickfin can help you manage and distribute tips, sign up for a demo with one of our in-house experts.

You might also be interested in

We know how important same-day payments are for veterans of the service industry who are accustomed to quick cash — and we’re now seeing that same demand expand into other industries as well. 

Kickfin co-founder Justin Roberts joined MasterCard’s InConversation Webinar series to discuss why immediate payment disbursal is key for the restaurant industry and the gig economy as a whole.

Watch the webinar here or read our recap for the highlights: 

People live paycheck-to-paycheck

Not just some people are living paycheck to paycheck. Most people are. 

That’s right: around 64% of U.S. consumers are just getting by. Even more shocking, 51% of consumers who earn over six figures are still living paycheck to paycheck, despite their higher tax bracket. 

It’s a major reason why employees need access to their earnings sooner rather than later. The pressure of watching your bank account slowly drain in the two weeks between payday is putting a lot of pressure on people, leading to a much greater demand for instant payments than ever before. 

Instant payouts are now table stakes

A PYMNTS study found that people of all ages prefer to be paid out immediately, as well as some other interesting statistics:

  • When given the choice, 68% of respondents said they would opt for an instant pay out
  • 40% of gig workers surveyed were willing to pay a fee for an instant disbursement
  • 81% of respondents were willing to switch jobs to an employer that offers instant access to earned wages and tips

It’s safe to say instant payouts are becoming the expectation for today’s modern workforce. But not all instant payouts are created equal.

Consumers are much more likely to engage with an instant payout system if they aren’t required to share their bank account and routing numbers and can access funds with just their debit card credentials. Why? It’s faster, more convenient, and feels more secure. 

Instant payouts and tip management: a perfect use case.

Instant payout innovation has come at the perfect time for the restaurant industry, which is struggling more than ever with the hassles and cost of cash.

If you’re in the restaurant biz, then you know: Most consumers pay with credit cards these days, not cash. That means there’s rarely enough cash on hand to pay out tips at the end of a shift. But employees still want and need instant access to their tip earnings.

Enter: instant payouts. Offering employees the option to receive their tip earnings directly to their bank of choice, the second their shift ends, can go a long way in improving employee satisfaction and ensuring their financial security.

But instant payouts are more than a work perk for employees. The operational benefits for employers range from reduced administrative burden and significant time savings to stronger compliance and streamlined reporting.

Modernizing your tip management strategy: 5 best practices 

There are three key components to your tip management strategy: 

  • Tip pool policy: How are you divvying up tips among your staff? 
  • The payout method: How are you distributing those payments?
  • The systems and tech: What are you using to facilitate those payments?

Under the current circumstances, restaurant operators are under immense pressure to bring their tip management into the future. 

5 best practices for tip management 

Based on our experience working with restaurant operators across the country, we’ve found that these five practices are the perfect recipe for building a successful tip management system.  

  1. Determine the right model and method for your restaurant, based on your location and tech stack
  2. Get a written tip policy (and get it legally approved
  3. Solicit employee feedback in a structured way
  4. Leverage technology for efficiency, accuracy, and compliance
  5. Don’t over-complicate (but do over-communicate!)

Tip management solution must-haves

When seeking a new tip management solution, make sure you carefully vet each system to see if it really meets your needs, or if it’ll be just as frustrating as cash. Here are a few suggestions for what should be on your checklist: 

  • Instant payouts
  • Direct to bank of choice
  • Availability of employee funds
  • Payroll option 
  • Integrations 
  • Simple implementation + onboarding process 
  • Around-the-clock customer service 

Big emphasis on strong customer support teams. Restaurants and bars don’t have “typical” business hours, so neither should your tech support.

Bar Louie automates payouts with Kickfin 

In a recent case study, we took a deep dive into our partnership with Bar Louie, a chain with over 60 locations that took advantage of our new integration with Toast. They made the switch from cash payouts to Kickfin’s instant, direct-to-bank payouts and haven’t looked back.  

Two-minute tip-outs

Before Kickfin, managers spent an average of 45 minutes per shift working through Bar Louie’s complex tip out policy and counting cash. The tip pooling rules were important to them — it’s what makes the entire staff feel like they’re getting their fair share. 

Using the Kickfin0Toast integration, Bar Louie was able to automate the tip pool calculation process and send tips straight to employees in under two minutes – a potential annual savings of 15,000 labor hours across all locations.

>> See more customer success stories 

Do you want to see these kinds of cost-saving results at your business? Let’s talk. Get a demo of Kickfin and see why restaurant owners and employees alike trust us to manage their tips.

Kickfin’s best-in-class tip calculation tool has some exciting new bells and whistles.

If you’re already using Kickfin’s tip pool calculator, then you know how much time and hassle you’re saving by automating everything. (And if you’re not? Head over to our tip pooling software page to see how it works!)

As we partner with more restaurants to bring their tip management into the future, we’re continuing to innovate our product so we can address their biggest pain points.

In this case, that means enhancing our tip pooling features so you can auto-calculate tip amounts even for the most complex or unique tip pool or share policies.

Check out a few of our latest features that will make tip calculations easier than ever.

New Release: Splitting Large Party Tips 

If your restaurant often hosts large parties, you know that the tip share can get confusing. Say one server is taking care of a party of 40 with a bartender assigned to only make drinks for that party. Meanwhile, the server has a few other two-top tables that are getting drinks from the main service bar. At the end of the night, how do you ensure that the large-party bartender gets their fair share of the tip out (without spending an hour on your phone calculator)? 

Kickfin can now automate that process for you, alleviating questions from your event bartender and saving time and effort on the part of your managers. 

Seamless Integrations 

Kickfin is partnering with your POS system to integrate seamlessly with your existing restaurant tech. Already, we’re serving Toast customers through our integration — and your POS just might be up next. 

Kickfin integration users get access to new product features first, like our new tip-out transparency tool. Your employees can log into their Kickfin accounts and see exactly how their tips have been split between team members, offering them full transparency into your tip policy in action.

Manager Tips 

We’re always listening to feedback to improve the Kickfin experience, and this one goes out to all of our restaurant partners who asked us to streamline the manager tip reallocation process.

>>Learn more about managers & tipping laws

In most cases, managers are not allowed to earn tips since they are salaried employees. But we all know that managers often step in and take care of tables to help servers get out of the weeds. Well-meaning guests will most likely leave a tip, not knowing that the manager technically can’t accept them — so where does that money go?

Kickfin now features a default pool, where tips “paid” to a manager are automatically redistributed to tipped staff based on your restaurant’s tip policy. 

Improved Labor Data Accuracy

We all know how easy it is for an employee to forget to clock out after a long shift. And sure, they aren’t going to get paid for a 16-hour overnight shift, but when payday comes around, those extra hours create a nightmare for your payroll team. 

With Kickfin, all employees are required to be clocked out in order to finalize payments — so you’ll catch the labor data mistake long before your payroll team has to sort it out. 

Even Better Security 

We’re committed to protecting you and your employees’ hard-earned money, so we’re adding an extra layer of security for certain transactions. You can now enable double approval of payments that meet certain conditions:

  • First payment for new employees
  • Employees getting their first payout in X number of days
  • Employees receiving more than X payouts in a 24-hour period. 

With these extra guardrails in place, you can always be sure that the right money is going to the right person. Reach out to our support team to configure your custom security measures.

Using Kickfin is a win-win for operators, managers, and employees alike. Restaurateurs save on cash delivery and labor costs, managers shave hours off their workload, and servers have the same instant payment that they’re used to — without the hassle and uncertainty of cash. 

Want to learn more about Kickfin? Let us show you the ropes with a demo

You heard it here first: 2024 is the year of integrations. 

In an effort to make Kickfin even more user-friendly and adaptable for our partners, we’re working with restaurant tech leaders to integrate our tip management solution with their existing systems. 

First up — Toast! A trailblazer for cloud-based restaurant management technology, Toast is a favorite POS system for restaurants, food trucks, and bars. You probably know them best for being the first to create handheld POS devices, drastically changing the entire restaurant ecosystem. To make life easier for their customers, Toast partnered with Kickfin to create an integration that makes tip pooling, tip distribution, and calculation smoother. 

As restaurant tech innovators ourselves, this partnership is the perfect fit for Kickfin. 

Our goal at Kickfin is always to save time for managers, prevent loss for operators, and create more financial freedom for hospitality employees through pioneering technology that digitizes many of the analog processes that the restaurant industry is built on. 

As a member of the Toast Partner Ecosystem, we’ll be able to deliver our product to Toast customers and modernize their tip management systems with ease. Using technology that they’re already familiar with, Toast customers can reap the benefits of Kickfin with minimal ramp-up upon implementation.

“No two restaurants split tips the same way, but invariably, it takes too long and involves too much risk,”  said Justin Roberts, the co-CEO of Kickfin. “This integration allows for the utmost customization with a near-zero learning curve — truly the best of both worlds for restaurants that want to save time, reduce labor costs and make life easier for their team.”

And one of their partners is already enjoying the ROI with Kickfin. Bar Louie takes great pride in making tip distribution equitable for all of their employees, so they rely on a complex tip pooling system to ensure fair pay. Prior to using Kickfin, managers at each of their 60 locations spent 45 minutes at the end of every shift to make calculations and divvy out funds to all of their servers. Now, they’ve streamlined their tip-out process with Kickfin — and managers are doing the same work in less than a minute! That’s an annual average of 15,000 hours saved across their entire chain. 

>> Hear more Kickfin success stories

After implementing Kickfin, managers can spend their time on what matters most: delivering excellent customer service. That means more table touches, more support for your staff, and more time to focus on server training. 

With managers spending more time on the floor (instead of counting cash in the back), you’ll see better customer reviews, better service, and increased sales — all from digitizing your tip-outs with Kickfin.

We’re excited about our new partnership with Toast and the opportunity to make digital tipping a reality for their customers. For restaurants who aren’t using Toast, don’t worry! We look forward to providing similar integrations across the restaurant tech industry.  

Want to see these results for yourself? Find out how to become a Kickfin integration partner or check out a demo of our platform.

No growing pains here! 

We’re thrilled to announce that Inc. listed Kickfin in their list of the top 10 fastest growing companies in the Southwest. (In fact, we earned the #1 spot in the software category and were listed as #9 overall!) We’re honored to be included alongside innovative companies that are making a big difference in our region. 

Inc. measured Kickfin’s growth from 2020 to 2022 — which wasn’t an easy time for the restaurant industry, to say the least. In spite of the challenges posed by the pandemic, restaurant concepts across the country embraced Kickfin’s technology. 

As a group, the 2024 Inc. honorees averaged 136% growth and created 17,606 new jobs over a two-year period. Individually, Kickfin grew by a whopping 1,304% (yes, really!).

We want to recognize and thank both our amazing customers and the Kickfin team for being part of our success story and allowing us to be a part of theirs. 

Our Customers

For years, restaurants manually calculated and paid out cash tips — despite the increasing hassle and liability those old-school methods entail. It’s not because operators are tech-averse; there simply wasn’t a good way to automate the process that didn’t create new friction or require new workarounds. 

That’s precisely why we developed Kickfin. Of course, we’re proud of what we built and the team behind it (more on that below). But we owe a great deal of our success to the customers who trusted us enough to give Kickfin a shot — especially those early adopters who are now some of our longest-standing customers.

There’s a leap of faith involved when you partner with a vendor and layer in new technology, particularly when it impacts something as important and sensitive as how you pay your people.  We don’t take that lightly, and we are incredibly grateful for the opportunity to serve each and every customer who’s been on this journey with us.

>> Hear from our customers about their experiences with Kickfin

Our Team 

Every person on our team wholeheartedly believes in our mission and vision for the future. In short: we’re here to make the tip management process insanely easy for everyone so that paying out your people is (almost!) as great as getting paid. 

As backstory: Our co-founders, Brian and Justin, came up with the idea for Kickfin while dining out together and noticing that an armored car was dropping off cash. They asked why a restaurant would need a cash delivery when most patrons pay by card; the manager explained the cash was needed to pay out tips at the end of the shift. The inefficiency (and expense, and risk…) of that process was a lightbulb moment for Brian and Justin.

They set out to build a team who not only understood the problem, but could think critically and creatively about a solution — and bring it to life. 

From sales and marketing to product and support, every Kickfin employee has had a hand in the growth and success of our company, thanks to their passion for our purpose and their commitment to being best in class.

We’re proud of what we’ve achieved thus far, and we’re excited to continue collaborating with our customers, innovating on their behalf, and taking Kickfin to the next level together. Onward and upward!

See Kickfin in action!