Club glossary
What Is a Service Charge at a Club?
A mandatory percentage the club adds to a check or event bill; because the club sets it, the IRS treats amounts paid to staff from it as wages rather than tips.
A service charge is a mandatory amount — usually a percentage — that the club adds to a check or an event bill. Many private clubs add a service charge to every food and beverage check in place of tipping, and nearly all add one to banquets. Because the club sets the amount and the member cannot change or refuse it, a service charge is not a tip: it is club revenue, and any part the club pays out to staff is treated as wages.
Service charge vs. gratuity
The IRS distinguishes the two in Revenue Ruling 2012-18. A payment is generally a tip only if:
- it is made free from compulsion;
- the customer has the unrestricted right to decide the amount;
- it is not subject to negotiation or dictated by employer policy; and
- the customer generally has the right to decide who receives it.
A fixed 20% charge on every member check fails those tests, so it is a service charge. Amounts the club distributes to employees from it are wages, subject to payroll tax withholding, rather than tips the employee reports. A voluntary tip line on the chit, filled in by the member, remains a tip.
How clubs use service charges
- Dining and bar — a flat percentage on every check, sometimes with an optional additional tip.
- Banquets and events — a percentage on food and beverage, stated on the banquet event order and the contract.
- Different rates by outlet or event — for example, a lower rate at the halfway house, or a different rate for an outside wedding than for a member dinner.
Clubs decide how the service charge is used: distributed to service staff, used to fund wages and benefits generally, or retained. Sales tax treatment and disclosure rules for service charges vary by state.
Example
A member dinner check has $120 of food and wine. The club adds an 18% service charge of $21.60 and sales tax. The member may add a tip on top. The $21.60 is club revenue; if the club distributes it to the servers, it runs through payroll as wages.
Why it matters at a private club
Getting the distinction right affects payroll taxes, how staff are paid, and how revenue is reported. It also affects members: they want the charge stated clearly on every chit and statement, and they want to know whether it goes to the staff. For the controller, the service charge should be posted to its own account so food and beverage sales are not overstated.
This is general information, not tax advice; clubs should confirm their treatment with their tax adviser.
Related terms
For policy design, payroll treatment and state considerations, see service charge vs. gratuity.
In Bubs: the club sets service charges as flat or percentage rules by outlet, area or event; they print as their own line on the chit and statement and post to their own account. See member billing and food & beverage.