How to Legally Implement a COVID Surcharge July 22,2020

Restaurants across the state have been reconsidering pay models in the new COVID-19 era. We have received several questions about “COVID surcharges” -- especially surrounding the legal considerations and whether restaurants can transition to this pay model. If you have questions about these surcharges, or if you need more guidance on the pay model you are considering, please reach out to us at We can answer your questions or pair you with an attorney in our Legal Resource Center. 

What many restaurants are calling COVID surcharges are really service charges, and they are subject to the same considerations. Service charges are amounts of money, typically a percentage of the total bill, that are added on to the pre-tax portion of the customer receipt. Service charges are also commonly known as auto-gratuities. 

There are some key considerations to keep in mind if you are exploringaCOVID surcharge for your restaurant:

  • Service charges are considered revenue to the business.
  • Sales tax must be collected on all service charges because they are considered revenue.
  • Service charges can be allocated within a business however ownership sees fit. Any portion of a service charge given to an employee does not count toward the tip credit. 
  • Service charges being allocated to employees should be treated the same as regular wages for tax withholding and filing purposes. 
  • Service charges can be used to compensate owners, managers, and supervisors. 
Read more about service charges here.

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