Get Started With Service Charges and Mandatory Gratuity

In this Article:

• Service Charges, Mandatory Gratuity, and Tips
• Employer-Kept Service Charges
  • Create and Edit Employer-Kept Service Charges
  • Assign Employer-Kept Service Charges to Service Areas
  • Employer-Kept Service Charges On Toast POS
  • Employer-Kept Service Charges In Reporting
• Mandatory Gratuity in Toast
  • Create and Edit Mandatory Gratuity Charges
  • Assign Mandatory Gratuity to Service Areas
  • Mandatory Gratuity On POS
  • Mandatory Gratuity in Tips Manager
  • Mandatory Gratuity In Reporting
  • Mandatory Gratuity in Toast Payroll
• Additional Resources

Service Charges, Mandatory Gratuity, and Tips

A service charge is an additional fee that is collected in exchange for a product or service on top of the cost of the goods. Restaurant owners may choose to add a service charge to a bill for various reasons, including:
 

• Large dining party fee (mandatory gratuity)
• Special menu upsell fee
• Banquet event fee
• Cutlery fee
• Hotel room service charge
• Bottle service charge
• Mandated service charge for healthcare

This article will reference two service charge terms that are separate and distinct in Toast:
 

• Employer-kept service charges: If a service charge is kept by the restaurant, it is not considered income for an employee and is considered part of net sales for an employer.
  • To compliantly apply a service charge to all forms of payment, ensure the service charge itself is entirely unrelated to using a credit or debit card (or other payment method) and that the service charge is being applied equally to all guest transactions regardless of the payment method (e.g., cards, cash, gift cards). Visit Compliant Service Charges Overview to learn more.
• Mandatory gratuity: If a service charge or part of a service charge is given to employees, it is referred to in Toast as a mandatory gratuity. This is different from a tip and is considered non-tip income for the employee. The most common example is automatic mandatory gratuity.

If you want to check where your service charge is given to a server or kept by the restaurant, you'll have to check the settings of the service charge in question to see whether it is set as a Gratuity. If the Gratuity setting is Yes, the fee will go to the server.

The above terms relate to service charges, but how do they relate to tips? In short, tips are determined by the customer while service charges are determined by the employer. A tip cannot be a service charge and vice-versa. According to the IRS, tips include: 

• Cash tips that are received directly from customers.
• Tips from customers who leave a tip through electronic settlement or payment. This includes a credit card, debit card, gift card, or any other electronic payment method.
• The value of any non-cash tips, such as tickets, or other items of value.
• Tip amounts received from other employees that are paid out through tip pools or tip splitting, or other formal or informal tip-sharing arrangements.

Four factors are used to determine whether a payment qualifies as a tip. In many cases, all four must apply. To be a tip:
 

• The payment must be made free from compulsion;
• The customer must have the unrestricted right to determine the amount;
• The payment should not be the subject of negotiations or dictated by employer policy; and
• Generally, the customer has the right to determine who receives the payment.

Note: Some jurisdictions require that businesses that impose a service charge clearly disclose how much, if any, an employee who provides services will receive from the service charge. Additionally, some jurisdictions require that if nothing is disclosed, or the disclosure is unclear, the entire service charge must be paid to the employee who provides services to the customer. You should verify the requirements in the jurisdictions in which you operate. 

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Employer-Kept Service Charges

Create and Edit Employer-Kept Service Charges

Service charges that are kept by the restaurant are maintained in Toast Web. For more options and types of service charges, read Customize Service Charges and Mandatory Gratuity.
 

1. Log in to Toast Web and navigate to Payments > Checks & receipts setup > Service charges.
2. Select +Add to create a new service charge.
   
   
3. Configure these options on your screen:
   1. Name: Name of the service charge as it will appear on the POS and receipt, if applicable.
   2. Charge Type: Fixed Percent, Fixed Amount (dollar), or Open Amount (user enters dollar amount each time this service charge is applied) Note: Open Amount cannot be used if the service charge is for Takeout or Delivery.
   3. Charge Percent/Amount: How much will be charged. Its configuration depends on the Charge Type.
   4. Apply After Amount Threshold: Setting the Apply After Amount Threshold to $0.01 or more will automatically apply this service charge to any order, regardless of dining option. Setting this amount to a higher value will automatically apply the charge to orders of a greater or equal pre-discount amount.
   5. Assign to check owner (Gratuity?):
      1. If you select Yes, this service charge will be configured as gratuity and will be paid out to the check owner. When a service charge is assigned to the check owner like this, the digital receipt tip prompt will always show 3%, 5%, and 7% as the tip options. 
      2. If you select No, this service charge will be included in net sales for the business. This will lower the suggested tip on physical and digital receipts by the percentage of the service charge.
      3. Please check out this article: Configure Delivery Fees Using Your Own Drivers, for more information.

   6. Taxed?: For US customers: Selecting Yes here will include the service charge in the taxable amount of the check. Selecting No will keep the service charge from having tax applied.

Note: Customers in Australia, Canada, Ireland, and the UK will see a Tax Settings menu instead of a Yes/No toggle. This enhanced tax handling is currently in limited release and will be available for US customers in the future.

Choose the option that fits your local requirements:

• • • No tax: No tax will be added to the service charge.
    • Tax inclusive: Tax is already included in the service charge amount.
    • Tax exclusive: Tax is added on top of the service charge.

Example: If a service charge is $10 and the tax rate is 10%

• • • No tax: Guest pays $10
    • Tax inclusive: Guest pays $10 (this already includes $0.91 tax and $9.09 service charge)
    • Tax exclusive: Guest pays $11 ($10 service charge + $1 tax)

Note: The default setting for tip calculation is to calculate tip before tax is added to a check. To make a change, follow the steps in this article Calculate Tip Before or After Taxes.

1. 7. Calculated on pre-discount or post-discount total?:  If your tax settings are configured to apply tax to the service charge, this further customizes when the charge should be taxed. If no tax is applied, you can ignore this setting. 
   8. Delivery?: Selecting Yes here will automatically assign this service charge to any checks with a Delivery dining option. This service charge will show up on receipts as "Delivery Fee" on guest receipts and in reporting, regardless of the name its given. Selecting No will not automatically apply this service charge.
      1. If multiple service charges have the Delivery? option set to Yes, they will be combined in to a single "Delivery Fee" on receipts and reports.
      2. Because of the "Delivery Fee" renaming structure, we do not recommend configuring a service charge with both Delivery? and Takeout? set to Yes. Doing this will cause these service charges on takeout checks to be categorized as "Delivery Fee".
      3. Instead, create separate service charges for Delivery and Takeout orders.
   9. Takeout?: Selecting Yes here will automatically assign this service charge to any checks with a Takeout dining option. Selecting No will not automatically apply this service charge.
   10. Dine-in?: Selecting Yes here will automatically assign this service charge to any checks with a Dine In dining option. Selecting No will not automatically apply this service charge.
   11. To create a service charge that should be applied manually, the Delivery?, Takeout?, and Dine-in? options must all be set to No.
       1. Note: You cannot isolate a service charge to a single revenue center, but you can assign it to a single dining option.

For employer-kept service charges, the most important setting is Assign to Check Owner (Gratuity?). In order for this to be a service charge and pay the funds to the employer, No must be selected.

 

Employer-Kept Service Charges in Reporting

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Mandatory Gratuity in Toast

Mandatory gratuity, also known as auto-gratuity, auto-grat, or included gratuity, is a service charge designated to the employee(s) providing a guest with products or services. This is different from a tip and is considered income for the employee.
 

Create and Edit Mandatory Gratuity Charges

Service charges paid to an employee as gratuity are maintained in Toast Web. For more options and types of service charges, read Customize Service Charges and Mandatory Gratuity.
 

1. Log into Toast Web and navigate to Payments > Checks & receipts setup > Service charges.
2. Select +Add to create a new service charge.
   
   
3. Configure these options on your screen:
   1. Name: Name of the service charge as it will appear on the POS and receipt, if applicable.
   2. Charge Type: Fixed Percent, Fixed Amount (dollar), or Open Amount (user enters dollar amount each time this service charge is applied) Note: Open Amount cannot be used if the service charge is for Takeout or Delivery.
   3. Charge Percent/Amount: How much will be charged. Its configuration depends on the Charge Type.
   4. Apply After Amount Threshold: Setting the Apply After Amount Threshold to $0.01 or more will automatically apply this service charge to any order, regardless of dining option. Setting this amount to a higher value will automatically apply the charge to orders of a greater or equal pre-discount amount.
   5. Assign to check owner (Gratuity?):
      1. If you select Yes, this service charge will be configured as gratuity and will be paid out to the check owner. When a service charge is assigned to the check owner like this, the digital receipt tip prompt will always show 3%, 5%, and 7% as the tip options.
      2. If you select No, this service charge will be included in net sales for the business. The suggested tip amounts will be the amounts set in UI Options > Tipping.
   6. Taxed?: For US customers: Selecting Yes here will include the service charge in the taxable amount of the check. Selecting No will keep the service charge from having tax applied.

Note: Customers in Australia, Canada, Ireland, and the UK will see a Tax Settings menu instead of a Yes/No toggle. This enhanced tax handling is currently in limited release and will be available for US customers in the future.

Choose the option that fits your local requirements:

• • • No tax: No tax will be added to the service charge.
    • Tax inclusive: Tax is already included in the service charge amount.
    • Tax exclusive: Tax is added on top of the service charge.

Example: If a service charge is $10 and the tax rate is 10%

• • • No tax: Guest pays $10
    • Tax inclusive: Guest pays $10 (this already includes $0.91 tax and $9.09 service charge)
    • Tax exclusive: Guest pays $11 ($10 service charge + $1 tax)

Note: The default setting for tip calculation is to calculate tip before tax is added to a check. To make a change, follow the steps in this article Calculate Tip Before or After Taxes.

• 7. Calculated on pre-discount or post-discount total?: If your tax settings are configured to apply tax to the service charge, this further customizes when the charge should be taxed. If no tax is applied, you can ignore this setting. 
  8. Delivery?: Selecting Yes here will automatically assign this service charge to any checks with a Delivery dining option. This service charge will show up on receipts as "Delivery Fee" on guest receipts and in reporting, regardless of the name its given. Selecting No will not automatically apply this service charge.
     1. If multiple service charges have the Delivery? option set to Yes, they will be combined in to a single "Delivery Fee" on receipts and reports.
     2. Because of the "Delivery Fee" renaming structure, we do not recommend configuring a service charge with both Delivery? and Takeout? set to Yes. Doing this will cause these service charges on takeout checks to be categorized as "Delivery Fee".
     3. Instead, create separate service charges for Delivery and Takeout orders.
  9. Takeout?: Selecting Yes here will automatically assign this service charge to any checks with a Takeout dining option. Selecting No will not automatically apply this service charge.
  10. Dine-in?: Selecting Yes here will automatically assign this service charge to any checks with a Dine In dining option. Selecting No will not automatically apply this service charge.
      1. Note: To create a service charge that should be applied manually, the Delivery?, Takeout?, and Dine-in? options must all be set to No.

For mandatory gratuity service charges, the most important setting is Assign to Check Owner (Gratuity?). In order for this to be a service charge and pay the funds to the employee, Yes must be selected.  Following these steps will allow this gratuity to appear and be distributed within Toast Tips Manager, if applicable.

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Assign Mandatory Gratuity to Service Areas

To automatically apply a mandatory gratuity to specific service areas, follow these steps:
 

1. In Toast Web, navigate to Front of house > Tables & sections > Service areas.
2. Select your desired service area or select + Add Service Area to create a new one.
3. Locate the Auto-applied Gratuity section and select Yes next to the Auto-apply Gratuity? setting.
4. Next, select Select Service Charge to add one of your existing service charges that will apply to tables in this service area. You can also configure the minimum number of guests required at the table for the auto-gratuity to be added to the check.
5. Save and Publish your changes.

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Mandatory Gratuity On POS

To add mandatory gratuity to a check, select the Service charge button from the bottom of the POS payment screen. If you're using a Toast Go® handheld, this may be found in the three dots (overflow menu) in the top-right corner of the check.
When mandatory gratuity is applied to a check, it will not appear on its own line like service charges, but will instead appear within a Fees and Charges section near the subtotal at the bottom of the check.

Mandatory Gratuity in Tips Manager

To configure mandatory gratuities for Toast Tips Manager, select them from the Source drop-down menu of your tip pooling policy. You can select specific gratuities by expanding Cash gratuities or Non-cash gratuities in the drop-down menu (in this example, Large Party Gratuity) or you can select them all at once with the adjacent checkbox (Non-cash gratuities in the below example). Keep in mind that gratuities that affect any online ordering or in-house delivery drivers need to be configured with special consideration.
 

Mandatory Gratuity in Reporting

Mandatory gratuity reporting can be found in Toast Web by navigating to Reports > Labor > Shifts. Set the appropriate date range and select Update in the top-right corner. Now select the Show/Hide Columns button on the right side. Check mark both Cash Gratuity and Non-Cash Gratuity. These will display immediately and allow you to view mandatory gratuity totals per employee per shift.
 

If you use Toast Tips Manager, you may also view mandatory gratuity reporting by using the Tips Management report. Navigate to Reports > Labor > Tip management. Learn more about Tips Manager reporting in Get Started With Toast Tips Manager.
 

Mandatory Gratuity in Toast Payroll

Anytime mandatory gratuity shows up in Toast Payroll, it will always appear next to an associated earning code. There are two different ways of bringing mandatory gratuity from Toast Web to Toast Payroll. The Tips Manager method automatically adds mandatory gratuity into the Payroll system and it will appear on timesheets, appropriate payrolls, reporting, and pay stubs. Otherwise, adding mandatory gratuity manually to the Employee Earnings step of payroll does not also add it to timesheets. This article has more information on the two methods, but note that tips and mandatory gratuity are separate.
 

When the Tips Manager method is used, mandatory gratuity earning codes will need to be set up and mapped before Toast can sync mandatory gratuity from Toast Web to Toast Payroll. Visit Toast Payroll: Tips Manager With Toast Payroll for directions on mapping earning codes. To create new earning codes, select the blue chat button in the lower-right corner of any Toast Payroll page and submit this form to a Care agent.
 

As mentioned previously, mandatory gratuity is paid to an individual on payroll whereas an employer-kept service charge is business income only. Employer-kept service charges do not appear in Toast Payroll.
 

Additional Resources

• Customize Service Charges and Mandatory Gratuity
• Compliant Service Charges Overview
• Toast Payroll: Manage and Integrate Tips

This content is for informational purposes and is not intended as legal, tax, HR, or any other professional advice. Please contact an attorney or other professional for advice.