A gratuity is a voluntary tip owned by staff; a service charge is a mandatory fee the restaurant collects and controls, with different tax and payroll treatment.
Gratuity vs. Service Charge
A gratuity is a voluntary tip owned by staff; a service charge is a mandatory fee the restaurant collects and controls, with different tax and payroll treatment.
Gratuity and service charge are often confused but are treated very differently. A gratuity (tip) is a voluntary amount the guest chooses to leave, and it belongs to the employees. A service charge is a mandatory fee the restaurant adds to the bill — common on large parties, prix-fixe events, or as an automatic percentage — and legally it is restaurant revenue the business controls and distributes.
The distinction drives tax, payroll, and reporting treatment.
- Gratuities are employee tips: reportable by the worker, factored into tip credits and pooling rules.
- Service charges are the restaurant's income first; any portion paid to staff is treated as wages, not tips, which changes payroll tax handling.
Because the two hit the books and the paycheck differently, a POS and payroll setup have to categorize them correctly, and scheduling/payroll tools handle the staff distribution.