Tips vs Service Charge - Handle them Correctly

November 21, 2018

Do you ever put an automatic charge on your receipts? Maybe for large parties coming in during the holiday season? Just a reminder that if it looks like a service charge, or acts like a service charge, no matter what you call it…it’s a service charge. If your restaurant collects a service charge, the CRA wants to make sure you are handling them appropriately. It is important to note the key differences. 


  • Freely given to the employee by the customer.
  • Employee’s money! Outside of a legal tip pool the business has no control of that money.
  • All tips must be reported by the employee to the establishment for income reporting purposes.

 Service Charge

  • Any charge that is automatically applied to a bill and the customer doesn’t have the ability to choose whether to pay it or not.
  • MUST COLLECT SALES TAX – This is where a lot of restaurants get into trouble with the Department of Revenue.
  • Shall be considered revenue to the business
  • The business may keep all of a service charge or give a portion of it back to the employees, but must be accounted for like normal payroll would be.
  • Money given to an employee from a service charge cannot count toward a tip credit.

Use this information to ensure your procedures are correct and avoid any Dept of Revenue or IRS violations. If you have any questions about tips and service charges, please contact

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