Service charge vs tip: what the difference means for a restaurant
Updated October 20, 2026
A service charge is an amount the restaurant adds to the bill and sets itself, such as 18% on parties of eight or more. A tip is money the guest chooses to leave and decides the amount of. The difference matters: in the US a service charge is the restaurant's revenue (and wages when it's paid out to staff), while a tip belongs to the employee who earns it.
In short
- Who decides the amount? The restaurant → service charge. The guest → tip.
- A label doesn't make it a tip. The IRS looks at the facts, not what the line on the bill says.
- California has required mandatory fees to be shown wherever prices are shown since July 1, 2024 (SB 478, as amended by SB 1524).
- On Menuthere a percentage service charge and tips are both optional switches, each on its own bill line, outside India.
Service charge vs tip
| Service charge | Tip (gratuity) | |
|---|---|---|
| Who sets the amount | The restaurant | The guest |
| Can the guest refuse it? | Not if it's mandatory | Always |
| Examples | 18% for large parties, a banquet fee, a "kitchen appreciation" fee | A cash tip, an amount written on the receipt, a tip chosen on a screen with a "no tip" option |
| US federal tax treatment | Business revenue; paid to staff as wages, reported on Form W-2 | The employee's income; cash tips of $20 or more a month are reported to the employer in writing |
| Disclosure | Must be clear before ordering in many places (see California below) | No disclosure rule; it's voluntary |
How the IRS tells them apart
The IRS says a payment is a tip "only if the customer voluntarily decides to pay it and determines the amount," and that whether a payment is a tip depends on the facts and circumstances: calling it a "tip" doesn't decide it. Its examples of service charges include an automatic 18% charge for large parties, gratuities required by a contract or invoice, and a digital prompt that requires a tip above zero. Service charges distributed to employees "must be treated as wages." A preset percentage the guest can only accept or remove may not meet the tip test, so ask your accountant how to treat it.
California: fees have to be shown with prices
California's "junk fee" law (SB 478) has applied since July 1, 2024. After SB 1524, restaurants and bars may keep a mandatory fee or service charge out of the menu price only if the fee is "clearly and conspicuously displayed wherever prices are shown," according to the California Attorney General. Tips are not affected because they aren't mandatory, and optional fees don't have to be built into the advertised price. Other states and cities have their own rules, so check where you operate.
A worked bill
A table orders $120.00 of food and uses a $20.00 discount code. The restaurant has a 12.5% optional service charge on dine-in and offers 10 / 15 / 20% tips.
| Line | How it's worked out | Amount |
|---|---|---|
| Food | $120.00 | |
| Discount | −$20.00 | |
| Food after discounts | $100.00 | |
| Sales tax at 8% | On the food after discounts | $8.00 |
| Service charge (optional) 12.5% | On the food after discounts, not on tax | $12.50 |
| Tip 15% | On the food after discounts | $15.00 |
| Total | $135.50 |
(Illustrative rates.) If the guest removes the optional service charge, the total falls to $123.00.
How Menuthere handles service charges and tips
- Service charge. Switch on Add a service charge under Tips & service charge, enter a percentage (up to 50%), and choose the order types; Dine-in only is picked at first. The bill line reads, for example, Service charge (optional) 12.5%.
- Optional for the guest. At checkout the service charge shows in its own card, marked optional, with a Remove button and Add back.
- Worked out on the food after money-off discounts. Tax, delivery, packaging and other charges are not part of it. It isn't taxed, except in the UAE, Saudi Arabia, Bahrain and Oman.
- Tips. Switch on Let customers add a tip and type up to four percentages (10, 15 and 20 at first). Checkout shows No tip, your percentages and Custom, with No tip selected until the guest picks. Tips are never taxed.
- Their own lines everywhere: on the checkout bill, the customer's order page, printed bills and the order screen. Both are part of the order total, so online payments charge them too.
- Edited orders. If you change an order's dishes, the service charge is worked out again; a tip keeps its amount.
- Help: tips and service charge. To share tips among staff, try the free tip pooling calculator.
What it doesn't do: there is no mandatory (non-removable) service charge or automatic large-party gratuity. Tips and the service charge aren't available for stores in India, and orders rung up on the counter POS don't add them.
Offer tips and an optional service charge at checkout, clearly shown on every bill.
Related terms
- Tax-inclusive pricing: whether tax sits inside the menu price or on top.
- Payment processing fee: the card fee, charged on the whole total, tips included.
- Price parity: one price on every channel.
FAQs
What is the difference between a service charge and a tip?
A service charge is set by the restaurant and added to the bill, such as 18% for a large party. A tip is chosen by the guest, who decides whether to give it and how much. In the US a service charge is the restaurant's revenue, and wages when paid to staff, while a tip belongs to the employee.
Is a service charge a tip under IRS rules?
Usually not. The IRS treats a payment as a tip only if the customer voluntarily decides to pay it and sets the amount. Automatic charges, such as a mandatory 18% for large parties, are service charges, and when paid to employees they are wages.
Is a restaurant service charge legal in California?
Yes, if it is shown properly. Since July 1, 2024, a restaurant's mandatory fee must be clearly and conspicuously displayed wherever prices are shown, according to the California Attorney General. Tips and optional fees are not covered by that rule.
Can customers remove a service charge?
They can if the restaurant makes it optional. On Menuthere the service charge is always shown as optional at checkout, with a Remove button, and the guest can add it back.
Is the service charge taxed on Menuthere?
Not by default. Menuthere adds no tax to the service charge, except in the UAE, Saudi Arabia, Bahrain and Oman, where your tax percentage is added on top. Tips are never taxed.
Sources (3)
- IRS, Tip recordkeeping and reporting ("A payment is a tip only if the customer voluntarily decides to pay it and determines the amount"; facts and circumstances; label not determinative; service-charge examples incl. mandatory 18% for large parties, required gratuities, digital prompts requiring a tip above zero; "Service charges distributed to employees must be treated as wages"; Form W-2; "Report all cash tips to the employer, unless the total is less than $20 per month"), page last reviewed or updated 31 Jul 2026: https://www.irs.gov/businesses/small-businesses-self-employed/tip-recordkeeping-and-reporting (accessed 20 Oct 2026)
- State of California, Department of Justice, Office of the Attorney General: Hidden fees (SB 478 from July 1, 2024, amended by SB 1524; restaurants' mandatory fees exempt "so long as the fee is clearly and conspicuously displayed wherever prices are shown"; tips not affected; optional fees need not be in the advertised price): https://oag.ca.gov/hiddenfees (accessed 20 Oct 2026)
- Menuthere help: Tips and service charge, updated 20 Oct 2026 (percentage up to 50%; "Service charge (optional) 12.5%"; Dine-in picked at first; Remove / Add back; worked out on dishes after money-off discounts; untaxed except AE/SA/BH/OM; up to four tip percentages, 10/15/20; No tip selected; custom tip up to the food total; tips never taxed; own lines; part of the total; edited orders; not in India or Petpooja-linked stores; POS doesn't add them): https://menuthere.com/docs/checkout-payments/tips-and-service-charge (accessed 20 Oct 2026)