Service charges and tips on restaurant bills

Before you read

This guide is general information, not legal or tax advice. Every rule below links to the official page it comes from, with the day we read it. The rules differ by country (and in the US, by state), and they change. Check your own case with your accountant or a local adviser.

Two different things

• A service charge is an amount the restaurant puts on the bill — usually a percentage, such as 10%.
• A tip (or gratuity) is an amount the guest chooses to give, on top of the bill or in cash.

Most of the rules below turn on that difference: who decided the amount, how it is labelled, and who receives it.

India: a service charge must be voluntary

The Central Consumer Protection Authority issued guidelines on service charges in July 2022. They say no hotel or restaurant shall add a service charge automatically or by default in the bill, nor collect it by any other name.^[1] They also say no hotel or restaurant shall force a consumer to pay it; the consumer must be clearly told it is voluntary, optional and at their discretion, and entry or service must not be restricted because of it.^[2] And a service charge shall not be collected by adding it to the food bill and levying GST on the total amount.^[3]

In practice: if you use a service charge in India, it should not be on the bill unless the guest has agreed to it, and staff should be ready to take it off without argument.

United Kingdom: VAT on the charge, tips to the staff

HMRC's catering notice says a service charge you make is standard-rated, but no VAT is due on a tip the customer freely gives above your total charge.^[4]

Who keeps the money is covered by a separate law. Since 1 October 2024, employers in England, Scotland and Wales must pass on all tips and service charges to workers without deductions, except in very limited cases such as deducting income tax, by the end of the month after customers paid them.^[5] The statutory code adds that an employer must have a written tipping policy, available to all workers, when qualifying tips are paid at its place of business on more than an occasional and exceptional basis, and must keep a record of tips for three years, which a worker may ask to see.^[6]

United States: it depends on the state and the label

US states tax tips and service charges differently. Three examples:

• California: an optional tip, gratuity or service charge is not taxable — generally a tip is optional when the customer adds it or leaves it on top of the amount due — while a mandatory one is included in taxable gross receipts, even if later paid to employees.^[7] A charge is mandatory when menus or printed materials say a tip or service charge will or may be added (for example, to parties of 8 or more), and an amount the business adds as a tip to the bill is presumed mandatory.^[8]
• New York: a mandatory gratuity is not taxable only if it is shown separately, labelled as a gratuity, and all given to employees; service charges not listed as gratuities are taxable; tips a customer chooses to leave are not.^[9]
• Texas: no tax on a voluntary gratuity, nor on a mandatory gratuity of 20 percent or less that is separately and clearly labelled and given only to the employees who regularly provide the service; mandatory gratuities over 20 percent are taxable.^[10]

If you add an automatic gratuity for large parties, the wording on your menu and your bill decides how it is taxed. See our US sales tax guide.

Singapore: the service charge carries GST

In Singapore the service charge decides how you may show prices. Restaurants that impose a service charge may show prices before GST, with a prominent statement such as “Prices are subject to GST and service charge”; this does not apply without a service charge, or to a nominal service charge without genuine business reasons.^[11] And GST is charged on the service charge: in IRAS's example, $100 of food and drink plus a 10% service charge of $10, then 9% GST on the $110, is $119.90.^[12]

Malaysia: no service tax on the service charge

In Customs' FAQ for food and beverage operators, a service charge is not subject to service tax, and tips are not subject to service tax.^[13]

Good practice wherever you are

Whatever the rules in your country, a few habits keep guests and staff on side:

• Name it plainly. "Service charge 10%" or "Tip", never a vague "Admin fee".
• Tell guests before they order if a service charge applies — on the menu and at the table.
• Make removal easy where the charge is optional, and don't make staff argue about it.
• Write down how tips and service charges reach your staff, and stick to it.
• Keep records of what was collected and what was paid out.

How BillDine handles it

• A service charge only if you add one. In Settings → Billing rules → Charges, a service charge is a charge you create: a percentage of the bill (after or before discounts) or a flat amount, for the order types you choose (dine-in, takeaway, delivery), with its own tax group or No tax. Nothing is added unless you set it up.
• Off a single bill in two taps. On the POS, Charges on the order, then Remove (a reason is optional); the bill is worked out again, and Put back adds it again. Each kind of charge has its own permission; waiters may remove the service charge.
• Tips the guest chooses. In Settings → Billing rules → Payments, Enable Tips at checkout offers suggested tips (5, 10 and 15%; in the US 15, 18 and 20%) and a largest tip you set. At payment the guest picks a percent, an amount, or No Tip; for cash, Keep the change as tip keeps what the guest leaves.
• Tips are not sales. A tip is recorded as a tip, never as sales, and the payments report shows tips apart from what the bills charged.

A short checklist

1. Decide whether you need a service charge at all.
2. If you use one, name it clearly, tell guests before they order, and check its tax treatment.
3. Decide how tips reach your staff, and put it in writing.
4. Set your POS so the bill matches what you told guests.
5. Check the rules again once a year — this is an area that changes.