What is a Service Charge?
The service charges are the fees collected to cover the costs of services offered in association with the purchase of products and services. The fees are typically applied at the time of the purchase. Restaurants, banks, and airlines are examples of sectors that collect service charges.
It is also known as service fees. The business owners, employers, or service providers determine the service fees. So it is neither a payment determined by the customers nor made free from compulsion, and there is no scope for negotiation from the customers’ end. Simple examples include hotel room service fees and bottle service charges in restaurants.
Table of Contents
- What is a Service Charge?
- Service Charge Explained
- Examples
- Service Charge vs. Tip
- Service Charge vs. Gratuity
- Frequently Asked Questions (FAQs)
- Recommended Articles
Key Takeaways
- A service charge meaning portrays it as a charge collected by the business, retailer, or employer for specific services that occur when the customer purchases products or services from them.
- Examples of entities applying it include banks, restaurants, hotels, and airline companies.
- Obtaining service fees from customers helps companies to deliver exceptional services. However, at the same time, some companies may obtain high service fees from customers forcibly or compulsorily.
- There is a difference between the service fee and the tip. The former is a charge that the employer predetermines. In contrast, the latter is a discretionary charge paid by the customer to the employees to express appreciation.
Service Charge Explained
A service charge is an additional fee added on top of the price of the product or service. The customer generally pays it if the seller included it in the invoice or Bill, and the customer cannot easily treat it as optional. However, in most countries, according to service charge law or rule, it is not mandatory. For example, it cannot automatically be included in a restaurant bill or by default.
There are several pros and cons of imposing the service fee on products and services.
Pros:
- It enables firms to continue delivering exceptional customer service and products without raising the price of the products.
- There are no hidden costs charged to the customers.
- The provision for obtaining service fee brings healthy competition and motivate the business to provide the best of its services to the end customers, thereby increasing the business’s revenue.
- It powers the business owners to increase the wages of employees.
Cons:
- It reduces the purchasing power of consumers as they might think before buying the product or the service.
- Businesses may force customers to pay service fees.
Examples
Let us look at some examples to understand the concept better:
Example #1
Albert throws his marriage party in the Avenue Hotel in the southern town of Francisco. He planned and chose the most beautiful place with a beach view, and the guests enjoyed quality services. The total bill amount for the party was $15,500, and the service fee was $3,100 (25% of the $15,500). It is an example of hotels imposing a service fee representing a portion of the bill.
Example #2
Some online retailers offer free shipping services when delivering products to consumers and may or may not charge consumers for returns services. So in the competitive environment, adopting a favorable shipping strategy and return service fee can influence the market. For instance, a retailer can set free shipping services, and if the return falls under a “no-reason return” policy, the retailer can charge for the return service. In other words, a shipping price approach normally results in a lower return shipping charge, whereas a shipping-free strategy frequently results in a higher return service fee.
Example #3
A bank charges a monthly service fee or maintenance fee for its service. Each month, the cost is automatically deducted from the bank account. Examples of other fees charged by the bank include excessive transaction fees, overdraft fees, insufficient funds fees, ATM service charges, and early account closing fees.
Example #4
Airlines charge various costs for their services, including luggage fees, cancellation fees, early seat selection charges, and in-flight services, including WiFi, food, drink, and entertainment. In addition, an airport may impose a service fee known as an airport improvement fee or embarkation fee on departing and connecting passengers.
Service Charge vs. Tip
There is a distinction between the service fee and the tip. Service fees are commonly described as non-tip income paid to employees, and the charges are added to a customer’s bill. In contrast, tips are discretionary service charges that customers pay willingly to express their happiness or satisfaction with the service received. Also, the customer does not ask for the invoice for the tip provided. For example, people might feel the need to appreciate and hence tip the waiter for the services they offer as an additional payment. In addition, there are noncash tips, including tickets, passes, vouchers, etc. Hence tips and service charges in restaurants are different.
Service Charge vs. Gratuity
A gratuity is also a tip. When interpreted in an employer-employee environment, gratuity is the monetary benefit from employer to employee specifically provided at the time of retirement, resignation, etc. It is a way of showing gratitude to the employee for their services. Generally, gratuity calculation depends on the salary and total years of services completed by the employee.
Frequently Asked Questions (FAQs)
It depends on laws in the countries or varies with places. In some countries, they are optional, and consumers can pay at their discretion. In the USA, there is a practice that restaurants may note on their menu cards that an additional service fee must be paid and specifies the service fee as a fixed percentage of the food bill. The service fee obtained complements the gratuity paid to restaurant employees.
According to IRS rules, the social security tax, medicare tax, and federal income tax withholding are applicable on service fees.
Service fee calculation depends on the total bill amount or the purchase price of the primary product or service received. It is usually a fixed percentage of the bill amount. For example, it can be 10% or 20% of the bill amount. 10% of the food bill is typically added as a service fee by restaurants and hotels in many places in the United States.
Recommended Articles
This has been a Guide to What is Service Charge. We explain its meaning, examples, laws, pros, cons, vs. tip, vs. gratuity, and service fees in restaurants. You may also find some useful articles here:
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- Central Bank Digital Currency
- Contingent Fee
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