Service charges and tips

Are service charges and tips revenue under IFRS 15?

IFRS 15 defines the transaction price as the consideration a business expects to be entitled to in exchange for its goods or services, excluding amounts collected on behalf of third parties, such as sales taxes. A voluntary tip is a gift from the customer to the staff, chosen by the customer: the business is not entitled to it and merely collects it, so it is excluded from revenue. A mandatory service charge is different: the customer must pay it to receive the meal or room, so it is part of the price, and the business is entitled to it unless something obliges it to hand it over. See hospitality accounting and principal versus agent.

Service charges and tips: a month at a restaurant

A restaurant's food and drink sales for a month are US$ 400 thousand. It adds a mandatory 12.5% service charge to every bill, 50 thousand, and customers add 20 thousand of voluntary tips on card payments. All service charges and tips are distributed to staff through payroll the following month. Consider two cases: in the first, the restaurant decides how much of the service charge to distribute and could keep some; in the second, law requires it to pass the whole service charge to workers without deduction.

In the first case, the service charge is part of the price the restaurant is entitled to, so revenue is 450 thousand, and the 50 thousand it pays to staff is an employee cost under IAS 19. In the second case, the restaurant has a strong argument that it collects the service charge on behalf of its workers, so revenue is 400 thousand and the 50 thousand is a liability until paid out. In both cases, the 20 thousand of card tips are not revenue; they are a liability until passed to staff. Either way, the business's profit is the same; revenue and margins differ.

How should a business decide on mandatory service charges?

The key question is whether the business is entitled to the service charge or only collects it for its employees. Evidence includes whether the business decides how much goes to staff, whether it keeps any part, whether law or employment contracts require full distribution, and whether customers are told the charge goes entirely to staff. Payments to staff that the business makes as part of their pay, at its discretion, point to revenue and employee costs; a legal requirement to pass on every penny points to collection on behalf of workers. Whichever view is taken should be applied consistently and explained if material.

What about tronc schemes and tip pools?

In some countries, tips and service charges are distributed through a tronc, a pool run by an independent troncmaster who decides how it is shared among staff, which can change payroll tax treatment. In the UK, since October 2024, employers must pass all qualifying tips, gratuities and service charges to workers in full and have a written policy on how they are shared. A business that collects amounts for a tronc holds them as a liability until it hands them over and does not recognise them as revenue.

How are service charges and tips taxed in the US?

The IRS treats tips as amounts paid voluntarily by customers, who decide the amount. A mandatory service charge, such as an automatic gratuity for large parties, is not a tip: when it is paid to employees it is regular wages, subject to income tax withholding and payroll taxes as wages, and it does not count for the employer's FICA tip credit. Many states also charge sales tax on mandatory service charges but not on voluntary tips, so the distinction affects the bill too. For tax years 2025 to 2028, employees in occupations that customarily receive tips can deduct up to $25,000 of qualified tips, reduced for modified adjusted gross income above $150,000, or $300,000 for joint filers; mandatory service charges do not qualify. See payroll taxes explained.

How are these amounts presented?

Tips and service charges collected but not yet paid to staff are presented as other payables. Where service charges are revenue, some businesses disclose them separately, because they inflate revenue compared with businesses that exclude them. Hotels apply the same analysis to service charges on rooms, food and events, and to gratuities added to banquet bills. See tour operators for another hospitality principal or agent question.

How does US GAAP differ?

ASC 606 also excludes amounts collected on behalf of third parties from the transaction price, so voluntary tips are not revenue under US GAAP either. US restaurants and hotels commonly recognise mandatory service charges as revenue and record the amounts paid to employees as labour costs, consistent with their treatment as wages for tax. See restaurant leases.

This guide is general information. It is not tax or legal advice for your situation.