In the hospitality business, every detail counts — including how we handle customer charges. One of the most overlooked yet powerful tools is the service fee. When implemented correctly, it can increase employee satisfaction, reduce payroll tax burdens, and enhance transparency in your business. Let’s take a closer look at how it works.
What Is a Service Fee?
A service fee is a fixed extra charge added to the customer’s bill, typically at checkout. Unlike a tip, which is voluntary and based on the customer’s goodwill, the service fee is mandatory, set by the restaurant or business policy.
Because of this mandatory nature, it carries important tax and payroll consequences that must be handled correctly by any business that chooses to use it.
Who Can Charge a Service Fee?
Anyone operating in the hospitality sector can charge a service fee — as long as they provide personal service. That includes restaurants, cafes, bars with table service, or any venue where staff directly engage with guests.
Self-service outlets (like open buffets or vending-style cafés) cannot legally apply a service fee, since no actual service is provided.
If your business chooses to introduce a service fee:
- You must inform your customers clearly — typically at the bottom of the menu.
- The fee can be up to 15% of the bill for individual customers, and up to 20% when invoicing companies.
How Does VAT Apply?
Service fees are subject to VAT, just like the rest of your bill.
- The VAT rate must match the items sold (e.g., 27% for alcohol, 5% for certain foods).
- If your menu includes items with different VAT rates, the service fee must be split proportionally between them.
- VAT collected on service fees adds to your VAT payable, just like any other revenue.
Taxation of the Service Fee
From a company perspective:
- Net service fee (excluding VAT) is treated as sales revenue, increasing your corporate tax base (TAO).
- However, since this amount is later paid out to employees, it becomes a deductible expense, effectively neutralizing its impact on corporate tax.
- It’s also excluded from local business tax (HIPA), making it a smart fiscal choice.
- Unfortunately net service fee charged on 5% VAT sales is subjected to Tourism tax.
How Is It Paid to Employees?
Legally, the net service fee (after VAT) must be distributed among employees involved in hospitality activities — not just the waiters, but also bartenders, hosts, kitchen staff, etc.
Your company should define how to allocate this amount (e.g., based on hours worked, position, or a point system).
Payroll rules:
- The employee receives the net amount (after VAT and social contribution deduction).
- Social contribution (18.5%) must be withheld and paid to the authorities.
- Importantly: no personal income tax or employer’s social tax is due.
This makes it a tax-efficient way to increase net salaries while keeping gross payroll costs under control.
Common Misconceptions
“We just included a bit more in the salary – that counts as service fee.”
➤ Not correct. Service fees must be calculated from actual monthly sales and handled separately from base salary.
“We can’t afford to pay more, so we keep wages low.”
➤ If you charge a service fee, you are legally required to pay it to employees. Otherwise, the charge is considered illegal.
“It’s too complicated.”
➤ While it has its complexities, it can be implemented with a simple system that becomes part of your monthly workflow.
Should You Introduce a Service Fee?
Absolutely — if you're in hospitality and looking to:
- Boost net salaries without increasing gross payroll expenses
- Stay compliant with tax and labor regulations
- Enhance transparency for both customers and staff
I help my clients calculate monthly service fees, structure fair employee distribution, and manage the payroll reporting efficiently.
If you’re exploring this option for your business or already dealing with the complexities and need support — feel free to reach out.
