Understanding Service Charges
As a small business owner, it’s important to understand how a service charge works. Especially if you’re looking for ways to offset the everyday costs of running your business. In this article we’ll break down what a service charge is, how it’s different from surcharges, and what to watch out for*.
What Is a Service Charge?
A service charge is an additional amount added to a sale to help cover the cost of providing a product or service. Service charges need to be clearly disclosed, consistently applied, and not tied to how the customer pays (cash, card, etc.), but instead to the service itself.
For example, businesses often use a service charge to help cover things like:
- Shipping and handling
- Setup or installation
- Rush processing
- Packaging costs
Service Charge vs. Surcharges
It’s can be easy to confuse a service charge with a surcharge, but there are differences between the two.
- A service charge is a fixed charge added by a business to cover the cost of providing a service, like packaging or handling.
- A surcharge is an extra, sometimes variable, fee added on top of the regular price to offset specific costs such as credit card use.
| Service Charge | Surcharge |
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It's important to know while surcharges are regulated by state law, they are also regulated by card network rules (like Visa or Mastercard).
Warning: Failing to follow state and card network rules can lead to fines or having your Autobooks account shut down.
When to Use a Service Charge
You can use a service charge when you’re providing something extra that increases the cost of doing business. A few good examples:
- You ship physical products and want to cover packaging or delivery costs.
- You offer special after-hours services.
- You handle orders that require manual prep or extra attention.
As long as the charge is clearly explained up front and not based on how the customer is paying, service charges are generally acceptable*.
Still Thinking About Passing on Credit Card Costs?
We get it, credit card processing fees can add up. But surcharging is not the same as applying a service charge, and the rules are very different. If your charge only applies to credit card transactions, it’s a surcharge. And if you’re in one of the states where surcharges are banned, that’s a big problem.
Do not disguise a credit card surcharge as a service charge.
If you’re looking for alternatives, consider:
- Offering a cash discount that you and your customer agree upon.
- Raising your prices slightly across the board to help cover business expenses.
- Using a service charge that applies fairly to all orders, regardless of payment type or customer.
A service charge can be a helpful tool to recover costs and stay profitable, especially in today’s economy. Just be sure you’re applying them legally and fairly, as transparency goes a long way with customers.
*This article is intended for general education purposes only. We recommend you consult professional counsel or a business attorney for the best advice.