If you run a business, then there’s a good chance that you will have to include a service charge at some point. Knowing how to set up a service charge, what to charge and how to process any associated payments is important if you’re going to make your service charge effective and customer friendly, but we know that not everybody knows all of the ins-and-outs of business, that’s why we’re here to help!
What is a service charge?
A service charge is a separate fee that customers pay which is related to the price charged for the actual goods or services being purchased.
In most cases, the service charge is added to the amount due at the time of the transaction. These types of charges are usually found in specific industries, such as hospitality, travel and tourism and banking. There are various types of service charges, some are in place simply to cover administration and processing costs, while others relate to an actual service being provided for the customer.
At first glance, a service charge can seem similar to a tip, but there are a few differences:
A service charge is paid directly to the business in question whereas a tip is paid to the individual employee providing a service
A tip is optional for the customer whereas a service charge is paid as part of the price of goods and services
The amount of the tip is decided by the customer whereas a service charge is set by the business
How do service charges work in operation?
One example of a service charge which most people recognise is the extra fee charged by a venue such as a cinema when a ticket is being booked. This service charge could be added to cover costs such as the operation of an electronic online booking system or, for larger ticketed events, the cost of providing security for customers. In some businesses, the service charge may have a different name:
Travel – it may be called a security fee
Hotels – it may be referred to as a booking fee
Banking – it may be called a maintenance fee
In many other cases, service charges are known as customer service fees.
What is the difference between a service charge and a surcharge?
A service charge is added to the overall price of a service or product to cover additional expenses incurred by the merchant providing it. It could be the cost of delivery, or of packing goods, and may be either a single flat rate fee per transaction, or a percentage of the overall cost of the goods or services.
A surcharge is an amount which is added to a bill when the payment is made via a credit card. This covers the payment processing fees associated with handling credit card payments. Another fee sometimes charged by a merchant is known as a convenience fee. This is if a merchant accepts a payment outside the channels they normally offer. If a customer wants to pay over the phone rather than in person, for example, a merchant may charge a convenience fee, no matter which payment method they opt to use.
Types of service charge
There are many different types of service charge across a range of different industries. Here are some examples:
Most hotels and restaurants present a service charge to customers in the form of a percentage of the total bill. This removes the element of uncertainty about whether a customer will offer a tip and exactly how much they will choose to pay. If a particularly large group is seated at a table in a restaurant or a meal has to be delivered to a hotel room, the establishment can apply a service charge. A bill for $300 with a service charge of 15%, for example, would demand a payment of $345.
The average bank account could involve any one of a number of potential service charges, usually levied at a standard flat rate. In most cases, this includes a monthly maintenance fee automatically debited from the account. In addition, banks often charge service fees for using an ATM from another bank or transferring money electronically.
Airline travel is an example of an industry which tends to charge multiple service fees. The average flight could include any of the following extra fees:
- Checked baggage fee
- Overweight baggage fee
- A charge for booking a seat early
- A charge for cancelling a booking
- Fees for services provided during the flight, such as food, entertainment and sometimes access to Wi-Fi.
Aside from the service charges applied by an airline, travellers may also find themselves paying an extra service charge, sometimes known as an airport improvement fee or embarkation fee. This is generally put in place by the government or an airport management corporation.
Many rented properties include a service charge on top of the monthly rental fee. If you live in an apartment block, you may have to pay the monthly rent for your actual appointment and then a service charge to cover the cost of general cleaning and maintenance of the building.
How can I set up a service charge?
The good news for those businesses which partner with Square is that we’ve made it extremely easy to set up service charges. If you’re using Square to take and process payments or to provide Point of Sale services, then creating and applying service charges is quick and simple.
Working in your Square Dashboard, you can create the service charge or charges you wish to apply and then, having created them, apply them across the Square POS app.
Depending upon your business and the frequency and type of service charges you wish to levy, you can opt for either manual or variable service charges. A manual service charge is applied as a fixed amount – either in dollars or as a percentage of the wider charge – no matter what the overall cost is going to be.
A variable charge, on the other hand, is set specifically as a dollar amount or percentage at the time of checkout being performed. The entire process involves just a few simple steps:
On the online Square Dashboard, go to Accounts and Settings
Click on Business, then Service Charges, then Create a service charge
Give the service charge a name, which will be shown on customer receipts and order summaries
Opt for either a percentage based service charge, or one which is fixed at a specific dollar rate
Enter the amount of the service charge, or leave it blank if you wish it to be entered at the time of the sale
Select the location at which the charge will apply and include any taxes which may be applicable
Once the service charge has been created via the Square Dashboard, it can be applied manually from the Square POS app, and service charges can be added to orders which include specific items, custom amounts, or both. It should be noted that a service charge cannot be applied multiple times in respect of a single sale or invoice.