The fee collected to pay for services related to the product or service being purchased
What is a Service Charge?
A service charge, also called a service fee, refers to a fee collected to pay for services that relate to a product or service that is being purchased. In other words, a service charge is an additional charge for the service provided with the purchase of a product or service. For example, a service charge is typically added to your bill in a restaurant to pay for the waiter or waitress who comes and services your table.
Service Charges in Different Industries
Service charges come with different names, depending on the industry concerned. For example:
Banking Industry
A monthly fee is typically charged to account holders for maintaining a checking or savings account with a bank. For example, TD Canada charges different monthly maintenance fees for their various checking accounts.
Hospitality Industry
A service fee as a percentage of the total bill for restaurants and hotels is commonplace. For example, in British Columbia, there is an unspoken rule to tip (service fee) at least 10% for restaurant dine-ins or deliveries.
Airline Industry
A number of service charges are collected when purchasing a plane ticket. Service charges by the airline industry are to pay for services such as entertainment, baggage handling, seat selection, travel agent commissions, etc. The extra fees charged by airlines are highly controversial, as they have increased substantially over the past 10 to 20 years. Many fliers resent having to pay hefty extra fees for services the airlines used to offer for free, such as baggage handling services. In the past, airline passengers could check as many bags as they wished, with no additional cost. But nowadays, virtually all airlines charge $25 or more per bag for anything beyond one bag/suitcase.
Utility Industry
In addition to the actual bill for power, most utility providers impose service charges in addition to the charges for electricity used. For example, Hydro Quebec imposes a number of service charges, such as an initial installation charge, monthly meter reading charge, etc.
Example
John is celebrating his second anniversary with his girlfriend. He decides to choose the most romantic restaurant in downtown Vancouver. Upon arriving at the destination, the couple is greeted by a number of servers and seated promptly.
The meal itself comes to a total of $120, including taxes. John realizes the exceptional and additional services provided by the waiters at the restaurant and decides to pay a gratuity (service charge) of 15% on top of his bill.
Airbnb Service Charges
Airbnb is an example of an online rental platform that imposes service charges to cover company costs. Airbnb has separate fees for hosts and guests.
For Hosts
Airbnb charges a 3% fee, which is taken out of the total reservation amount. In addition, taxes such as value-added tax (VAT) may be added on top of the basic service charge, depending on the location of the listing.
For Guests
Airbnb charges a 5-15% fee that varies depending on the cost of the rental. The more expensive the rental, the lower the service charge percentage.
Key Takeaways
A service charge refers to an additional fee collected for providing a product or service. It is typically collected when there are interactions between a consumer and the company involved. Depending on the industry, such charges have different names – such as booking fees (hotels), maintenance fees (banking), and security fees (travel).
Additional Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
FAQs
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 paid at the discretion of the customer after receiving a service.
Is the service charge the same as a tip? ›
The main difference between these two fees? A service charge is mandatory, and a tip is at the discretion of the customer. Technically, tipping is optional — but some customers might argue otherwise, given that tip income is critical for the service staff.
Why am I charged a service charge? ›
Services can include maintenance, repair, and sometimes improvement of roofs, foundations, window frames, guttering, communal drains and pipes and insurance of the building. Full details should be on the lease documents, which will also state when the service charge is due.
Should you pay a service charge? ›
If you're unsatisfied with the level of provision and maintenance provided, or if you believe the landlord has set the service charge at an unreasonably high level, there are ways to legally challenge it. However, aside from these routes, if you have a service charge in your contract, you should expect to pay it.
Can you decline a service charge at a restaurant? ›
Also called operations fees, service charges are mandatory fees automatically added to restaurant bills in California. Customers cannot elect to not pay the service charge because it is part of the bill.
Can you refuse to pay service charge in the USA? ›
A mandatory service charge is exactly that: mandatory, and as such, it must be declared upfront before the service starts. If the service is poor, it is the only excuse for failing to pay the mandatory service charge.
Why are restaurants now charging a service fee? ›
Coming out of the pandemic, many restaurants switched to charging a service fee to compensate staff instead of relying on the tip credit. (If you're not aware, tipped employees in many states earn a subminimum wage — a base wage lower than the minimum wage.
Why am I getting charged a service fee? ›
A service charge, also called a service fee, refers to a fee collected to pay for services that relate to a product or service that is being purchased. In other words, a service charge is an additional charge for the service provided with the purchase of a product or service.
Can you say no to a service charge? ›
Normally no as the payment of service charge is a firm and legal obligation duty laid out within the lease you would have signed when buying your property.
What is the point of a service charge? ›
A service charge is a fee collected to pay for services related to the primary product or service being purchased. The charge is usually added at the time of the transaction. Many industries collect service charges, including restaurants, banking, and travel and tourism.
tips, including: Service charges are required: Service charges are often mandatory, particularly in group settings or at events, and are intended to cover the costs associated with additional labor, operations, or to offset other business costs.
How to calculate service charge? ›
One way to calculate your share of the service charge: One of the usual ways to do this is to divide the area of your property by the total area of the building or complex. Then multiply this number by the total cost of providing services.
What should I charge for a service fee? ›
If you want to know how to determine pricing for a service, add together your total costs and multiply it by your desired profit margin percentage. Then, add that amount to your costs. Pro tip: Consider your costs, the market, your perceived value, and time invested to come up with a fair profit margin.
Should you tip if there is a service charge? ›
In most cases, the answer is yes. Since a service charge is not guaranteed to go to the server themselves, leaving a tip is a great way to thank your waiter for their hospitality.
Is a tip the same as a gratuity? ›
A gratuity (often called a tip) is a sum of money customarily given by a customer to certain service sector workers such as hospitality for the service they have performed, in addition to the basic price of the service. Leaving some change on the restaurant table is one way of giving a gratuity to the restaurant staff.
Is service charge legal in California? ›
Unlike tips, which businesses must fully distribute to employees, employers may keep service charges. Starting July 1, 2024, a new California law, SB 478, will prohibit businesses from adding automatic service charges onto consumer bills.
Are service charges and tips taxed differently? ›
Optional Charges
An optional payment designated as a tip, gratuity, or service charge is not subject to tax. A mandatory payment designated as a tip, gratuity, or service charge is included in taxable gross receipts, even if the amount is later paid by the retailer to employees.
Can a restaurant impose a service charge? ›
Now, the AG's office has made it clear: Restaurants will be prohibited from charging any additional fees, other than taxes, on top of menu prices, the San Francisco Chronicle reported.
Do you tip on top of automatic gratuity? ›
Tipping on top of a 20% automatic gratuity is not required. The automatic gratuity is intended to cover the customary tip. However, if you feel the service was exceptional, you are welcome to tip additionally.
