Restaurant Tipping, Service Charges and Card Surcharges

Three different charges

Customers see tips, service charges and card surcharges as extras on the bill, but they are different things. A tip is voluntary and chosen by the customer. A service charge is set by the restaurant, often for large parties, and is generally treated as the restaurant's revenue rather than a tip, which affects payroll and tax. A surcharge is a fee for paying by credit card and is governed by card network rules and local law. Labelling each clearly on menus and receipts avoids confusion and disputes.

How tip adjustment works

At a table-service restaurant, the card is usually authorized for the bill, then the tip is added and the final amount is captured later. Issuers expect the final amount to be reasonably close to the authorization. Very large tips relative to the bill, or tips added long after the meal, can cause the transaction to settle in a worse interchange program or be questioned.

Card fees apply to tips too

Your processing fee is calculated on the whole amount charged, including the tip. Whether a restaurant can pass that cost on to staff is governed by employment law where you operate, so check local rules before deducting anything from tips.

Batching on time

Close tips and batch every night. Batches submitted late are a common cause of downgrades in restaurants, and they delay your deposits.

Surcharges in restaurants

Where surcharges are allowed, they apply only to credit cards, never debit, must stay within the card network caps and your cost, and must be disclosed before the sale. Some places require more: New Jersey requires notice on the menu and in the service area, New York requires the total card price to be posted, and California's SB 478 requires unavoidable fees to be in the advertised price. Connecticut, Massachusetts, Maine and Quebec prohibit card surcharges. Our jurisdiction table has the details.

Service charges and advertised prices

A mandatory service charge added to every bill can be treated as part of the price under price-display laws in some places, including California's SB 478, and Canada's Competition Bureau has raised concerns about drip pricing. If every customer must pay it, consider including it in menu prices.

Pay at the table

Handheld terminals let customers pay and tip at the table with their card never leaving their sight. That reduces fraud, speeds table turns and makes tips easier to enter correctly.

Tip pooling and payroll

Tip pooling and tip sharing are governed by employment law, which varies by country, province and state. The payment system's job is to record tips accurately by server and shift and export them cleanly to payroll. Choose a POS that can do that, and get employment advice on the pooling rules that apply to you.

Large parties and auto-gratuities

Many restaurants add an automatic charge for large parties. Whether it is a tip or a service charge for tax and payroll purposes depends on how it is set and described, and on local law. Describe it clearly on the menu and on the bill so guests know what it is before they order.

Delivery and takeout

Takeout and delivery orders placed online are card-not-present and cost more than table payments. Tips on online orders should be passed to the right staff. Third-party delivery apps charge their own commissions, often far higher than card processing costs; many restaurants steer regulars to their own ordering page.

Cash discounts in restaurants

Some restaurants show a lower cash price and a higher card price rather than adding a surcharge. Whether that is allowed and how it must be displayed depends on local law and card network rules; in New York the card price must be posted, and in several states a discount must be a genuine reduction from the regular price. Check before you reprint menus.

Disputes over tips

Customers occasionally dispute a tip they say they did not add or a total that differs from the signed slip. Keep signed slips or the electronic record of the tip entered on the terminal, and do not change tips after the fact without the customer's instruction.

A simple setup checklist

Tip prompts set to sensible defaults; tips reported by server; batches closed nightly; surcharge settings off unless you have checked the law; service charges labelled clearly on menus and bills; and a terminal that can tell debit from credit if you surcharge at all.

What the card networks require for surcharges

In the US, Visa's rules allow surcharges on credit cards only, capped at your cost and at 3%, with 30 days' notice to your acquirer and disclosure at the entrance, the point of sale and on the receipt. In Canada, FCAC describes a 2.4% cap and similar notice and disclosure rules, and Quebec prohibits card fees. State and provincial law can be stricter. A surcharge that is not configured to skip debit cards breaks the rules on every debit tap.

Choosing an approach

Many restaurants decide the simplest option is to price card costs into the menu and focus on lowering them: interchange-plus pricing, nightly batching, fewer keyed transactions and removing junk fees. Others use a clearly disclosed surcharge where allowed. Either can work; what does not work is an unclear extra line that customers discover on the bill.

Tip prompts and customer trust

Suggested tip percentages on terminals are common, and guests notice whether they are calculated before or after tax and whether a no-tip option is easy to find. Set defaults you would be comfortable explaining to a regular, and make sure the prompt appears only where tipping is customary in your service style. Counter-service restaurants that prompt for tips on every sale sometimes see complaints; the setting is yours to choose.

Year-end and reporting

Card tips are recorded in your POS and appear in your deposits, so they must match what you report through payroll. Reconcile tips weekly rather than at year end, and keep the POS reports. Differences between recorded tips and paid tips are easier to fix within days than months later.

Reporting

Choose a POS that reports tips by server and shift and exports to payroll, so tips are paid and reported correctly.