What is a Service Charge and How Does It Affect Your Purchases?
A service charge is a fee collected to pay for services related to the primary product or service being purchased. This charge is usually added at the time of the transaction.
Many industries collect service charges, including restaurants, banking, travel, and tourism. These charges can cover services provided to the consumer or administrative and processing costs. Service charges are paid directly to the company, differing from tips, which are discretionary amounts given directly to an employee providing the service.
Key Takeaways
- A service charge is collected to pay for services related to the primary product or service being purchased.
- Service charges are different from tips, which are discretionary and paid by customers after receiving a service.
- Many industries such as restaurants, banking, and travel, collect service charges.
Understanding Service Charges
Service charges are additional charges related to the purchase of a product or service. They are generally collected when the transaction takes place between the consumer and the company. For example, a concert venue may charge a service fee in addition to the ticket price to cover security costs or the convenience of electronic purchases.
Service charges, also called service fees, go by different names depending on the industry, including booking fees (hotels), security fees (travel), maintenance fees (banking), and customer service fees.
Types of Service Charges
Hospitality Industry
Most hotels and restaurants in the U.S. charge a service fee as a percentage of the total bill, often in lieu of tipping. For example, a delivery fee for room service at a hotel or an automatic gratuity for large groups dining at a restaurant. If the total bill is $250, and the gratuity rate is 18%, then the total bill to be paid is $295 ($250 + 18% * $250).
Banking Industry
The banking industry levies various service charges, typically set at a flat standard rate. When you open a checking or savings account, the bank may charge a monthly maintenance fee. Additional service charges may apply for using an ATM from a competing bank or initiating a wire transfer.
Travel Industry
Airlines collect various service charges, such as checked or oversized baggage fees, change or cancellation fees, early seat selection fees, and inflight experience charges like WiFi, food, beverages, and entertainment. An airport improvement fee is another example, applicable to departing and connecting passengers to fund major airport improvements.
Residential Property
Renting specific residential properties may attach a service charge to the monthly rent. For example, condo tenants might pay a condo fee on top of the rent for general cleaning and maintenance. Online rental platforms like Airbnb charge service fees to cover payment processing associated with reservations, calculated as a percentage of the subtotal and applicable to renters and owners.
Service Charges vs. Tips
The Internal Revenue Service classifies service charges differently from tips. Charges like banquet event fees, automatic gratuities, hotel room charges, and bottle fees are considered service charges, treated like other wages for tax purposes.
In contrast, tips are discretionary. While a consumer may choose to give a tip, the amount and recipient are at the consumer’s discretion. A business cannot compel a consumer to tip, and the customer determines the amount and recipient of any tip given.
Related Terms: gratuity, maintenance fee, convenience fee, automatic gratuity, monthly maintenance fee.
