Is a service charge a tip? Under federal law, no. A charge the customer has to pay, like an automatic 18% gratuity on a party of eight or a banquet service fee, belongs to the restaurant. If the restaurant passes some of it to you, that money is wages, not tips, and it has to be handled as wages on your paycheck.
That sounds like a technicality, but it changes how the money is taxed, whether it can cover the minimum wage, and whether it raises your overtime rate. A few states also go further and say the charge belongs to the staff.
What makes something a tip
A tip is money a customer chooses to leave. The customer decides whether to tip, how much, and who gets it. Cash on the table, the tip line on a card slip, and money in a tip jar are all tips.
A service charge is set by the business. The customer does not get to decide. Federal wage rules (29 CFR 531.55) say a compulsory charge for service is not a tip, even if the restaurant hands every cent of it to the servers. The IRS takes the same view for taxes (Revenue Ruling 2012-18): if the customer did not freely choose the amount, it is a service charge.
What the menu calls it does not decide the question. A line on the bill labeled "gratuity" that the customer cannot remove is still a service charge under federal law.
Automatic gratuity on large parties
An automatic gratuity on a large party is a service charge. The party did not pick the amount, so it is not a tip, even though everyone at the table may think of it as one.
If the customer writes in an extra tip on top of the automatic gratuity, that extra amount is a real tip. It is yours (or your tip pool's) and follows the normal tip rules.
Banquet and event fees work the same way. A fixed "service fee" or "administrative fee" in an event contract is a service charge.
Who the money belongs to under federal law
Under federal law, a mandatory service charge is part of the employer's revenue. The employer can keep all of it, share some of it, or pay all of it to staff. Federal law does not require it to go to you.
Once the employer pays it to you, it is wages. That has three effects:
- It is not a tip for the tip credit. An employer that pays a tip credit wage can only count real tips toward the minimum wage. It cannot call service charge money "tips" and use it to justify a $2.13 cash wage.
- It is taxed as regular pay. Income tax, Social Security and Medicare are withheld from it like any other wages. You do not report it as tips on Form 4070.
- It counts in your regular rate. Service charges paid to you raise your regular rate, which raises what you are owed for any overtime that week.
Paid out to you, the money does count toward what your employer owes you. It counts as wages, not as tips.
States that treat some service charges as the workers'
Several states give the charge to the staff, or make the employer tell customers clearly when it keeps the money. The details matter, so read your state page before drawing conclusions.
| State | Rule in short |
|---|---|
| Massachusetts | A service charge, gratuity or tip on a bill goes to wait staff, service employees and service bartenders. The employer may keep a fee only if it is described in writing to the customer as a house or administrative fee that is not a tip. |
| New York | A charge presented as a gratuity must be paid in full to service employees, and any charge for "service" is presumed to be a gratuity. An administrative charge is not a gratuity only if customers are clearly told so on the contract, menu and bill. |
| Washington | The receipt and menu must say what share of a mandatory service charge goes to the employee. If that is missing or unclear, the whole charge goes to the employee who served the customer, on top of minimum wage. |
| Hawaii | A hotel or restaurant service charge on food or drink goes to employees as tip income unless the business clearly tells customers it is used for other costs. |
| Minnesota | A mandatory charge a customer could reasonably take as payment for personal service belongs to the employee unless the employer gives clear written notice that it is not a gratuity. |
| Delaware | A service charge belongs to the direct service employees unless the customer is clearly told (bold print on the bill or a sign) that part of it goes to management. |
| Maine | At banquets and private clubs, the employer must tell customers a service charge is not a tip before using it toward wages. |
| Pennsylvania | At banquets and special events, service fees and gratuities must be on separate lines, and contracts and menus must say if the service fee is not a gratuity for employees. |
Massachusetts is the clearest case. In most of the others, the answer depends on what the customer was told, which you may never see. If you worked the table, you can ask to see the menu, bill or event contract language.
Some other states have their own wording without changing the federal result. Michigan requires written notice to employees and customers of how service charges are distributed. California looks at whether customers see the charge as a tip; the state's Labor Commissioner says a charge may or may not be a gratuity depending on that, so a charge presented as a gratuity is worth raising with the office.
The TruWage checker treats service charges as tips only in Massachusetts. In the other states above it cannot see the disclosure, so the result points you to the state rule instead of deciding for you.
How a service charge should appear on your stub
If your employer pays you a share of service charges, look for it as its own wage line, often labeled "service charge," "SC," "banquet," "auto grat" or similar. It should:
- Be included in gross pay
- Have taxes withheld like your hourly pay
- Not be listed under tips reported, cash tips or charged tips
- Not be counted as tips that cover the gap between your cash wage and the minimum wage
The red flag is a stub where automatic gratuities are lumped into a tips line and your hourly rate is still the tipped cash wage. That can mean service charge money is being used as a tip credit. The checker flags this when you tell it service charges were counted as tips.
If you are not sure how your restaurant handles them, ask payroll in writing which line on the stub holds your service charge share. The letter template can help you word it.
If it looks wrong
Start with your own records: which checks had an automatic gratuity, the amounts, and what showed up on your stub that period. A shift tracker or a photo of each receipt makes this much easier.
Then run your stub through the checker, ask payroll, and if it is not fixed, see what to do if your paycheck is wrong. Your state labor agency takes wage claims for free, and you do not need a lawyer to file one.
Related reading: how the tip credit works, tip pool rules and overtime for tipped employees.
Check your own paycheck
Enter your stub and your hours. The checker applies your state's rules and shows anything that is short, with the rule behind it. Nothing you type leaves your browser.
Questions
Is an automatic gratuity a tip?
Not under federal law or for IRS purposes. Because the customer did not choose the amount, an automatic gratuity is a service charge. If your employer pays it to you, it is wages.
Does my employer have to give me the service charge?
Under federal law, no. Some states, including Massachusetts, New York, Washington, Hawaii, Minnesota and Delaware, give it to staff unless customers were clearly told otherwise. Check your state page.
Can a service charge count toward my tip credit?
No. Only real tips can count toward the tip credit. Service charge money paid to you is wages and should be on its own line in gross pay.
If a customer adds a tip on top of the automatic gratuity, whose is it?
The extra amount the customer chose to add is a real tip. It follows the normal tip rules, including any lawful tip pool.
TruWage is a calculator, not legal advice. It is not a law firm and does not refer you to one. Rules change and every situation is different; check with your state labor agency before acting on a result.