Corporate Finance & Accounting

service charge

What is the service charge?

A service fee is a fee charged for services related to the primary product or service purchased. Fees are usually added at the time of the transaction.

Many industries charge fees for services, including restaurants, banking, travel and tourism. When charged, these fees may include services provided to consumers, or may include administrative or processing fees.

The service fee is paid directly to the company. They are different from tips, which are paid to the employee who provided the service. The tip and amount paid is entirely up to the customer.

key takeaways

  • A service fee is charged to pay for services related to the primary product or service purchased.
  • Service charges are different from tips, which are paid by the customer after receiving the service.
  • Many industries charge fees for services, including restaurants, banking, travel and tourism.

Learn about service charges

A service fee is an additional fee associated with the purchase of a product or service. They are usually collected when a transaction occurs between a consumer and a company. For example, a concert venue may charge a service fee at the time of purchase in addition to the initial price of the ticket to cover security fees or to provide the convenience of electronic purchases.

Service charges are also known as service charges. They go by many different names depending on the industry, including reservation fees (hotels), security fees (travel), maintenance fees (banks), and customer service fees.

Type of service charge

Hospitality Industry

Most hotels and restaurants in the United States charge a service charge as a percentage of the total bill, usually in lieu of tip. Delivery charges charged for ordering room service at a hotel or tips charged on a large group meal bill at a restaurant are examples of service charges. If the total bill on the order is $250 and the tip is 18%, the total bill to be paid is $250 + (18% x $250) = $295.

banking

The banking industry charges a number of different service fees, usually set at a flat standard rate. When you open a checking or savings account with a bank, the bank charges a monthly maintenance fee. This fee is debited from the account at the end of the month. Banks also charge service fees for using competing banks’ ATMs or for initiating wire transfers.

tourism

Airlines charge a number of service fees, some of which include checked or oversized baggage fees, change or cancellation fees, advance seat selection fees, and fees for in-flight experiences such as WiFi, food, beverages and entertainment.

The Airport Improvement Fee or Boarding Fee is a service fee that applies to passengers departing and connecting at the airport. It is levied by the government or airport management company, and the proceeds are usually used to fund major improvements to the airport or expansion of airport services.

Depending on the location, the airport improvement fee is included in the cost of the passenger’s ticket, in which case the airline will pass the fee to the appropriate agency. However, in some places, the fee must be paid upon boarding.

residential property

Renting or leasing certain types of residential properties may have a service fee attached to the monthly rent. For example, a tenant of an apartment unit may be required to pay for the apartment in addition to the rent. The condo fee is a service fee for the general cleaning and maintenance of the building.

Online rental platforms that connect renters with property owners such as Airbnb charge service fees to cover payments related to bookings. Service charges are usually calculated as a percentage of the subtotal and apply to both tenants and landlords.

Service Charges and Tipping

According to the Internal Revenue Service (IRS), The difference between service charge and tip. Amounts charged to customers, including tips automatically added to bills, are considered service charges. The IRS classifies the following as service charges: banquet event charges, gratuities automatically added at large gatherings in restaurants and other dining facilities, hotel room charges, bottle charges, and cruise ship travel package charges.

Employers must report service fees to the IRS in the same way as other wages.

Tips, on the other hand, are discretionary. If consumers want to tip, that’s their choice. Tipping can be provided in cash or through an electronic payment system. They may also be made in kind, such as tickets and other valuables.

Merchants or businesses cannot force consumers to tip, consumers must be able to determine the amount. Also, customers have the right to decide who gets tips.

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