A mandatory fee added to a customer bill by the employer, such as an automatic gratuity. Service charges are not tips under FLSA and must be distributed to employees as wages, with full FICA withholding.
Why Service Charge matters for employers
Unlike voluntary tips left by the customer, service charges are revenue collected by the employer. Employers may distribute service charges to employees as they choose, but those distributions are wages subject to full payroll tax withholding, W-2 reporting, and minimum wage and overtime analysis. Service charges are not excluded from the regular rate of pay for overtime calculations the way discretionary tips are.
Some employers label what are effectively mandatory gratuities as service charges to retain control over distribution. If the IRS or DOL determines that an amount labeled a service charge is actually a tip (because the customer controls whether and how much to pay), it is reclassified with tip credit and reporting consequences.
How BEG handles Service Charge for clients
BEG Managed Payroll handles Service Charge as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Service Charge on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Service Charge themselves?
No. A managed payroll provider handles Service Charge as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Service Charge is handled incorrectly?
Errors related to Service Charge can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Service Charge for managed payroll clients?
BEG tracks, calculates, and remits everything related to Service Charge as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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