Service charge audit
Is the service charge calculated correctly?
Service charges look simple: one percentage. In practice, the percentage, what it applies to, and how tax treats it all vary. A small difference in method, repeated on every banquet check, adds up.
The short answer
To audit a hotel service charge, confirm three things for each banquet check: the percentage matches the contract, the charge applies only to what the contract says (often food and beverage, not room rental or AV), and tax is calculated on the right base. In many places tax applies to the service charge as well as the food.
Recalculate one check completely by hand. If the method is wrong on one, it's usually wrong on all of them.
Service charge is not the same as gratuity
Hotels usually add a service charge of about 20–26% to banquet food and beverage. Depending on the hotel and the jurisdiction, all, some or none of it may go to staff. Some hotels split it into a service charge and an administrative fee. That affects how tax treats it, and whether you choose to tip separately.
For an audit, what matters is what your contract says: the percentage, the base, and whether the rate is locked or "subject to change". If the hotel raised its standard percentage after you signed, your contracted percentage should still apply.
What the service charge applies to
Check your contract's wording. These are the usual defaults when it's specific.
| Charge type | Service charge usually applies? | What to check |
|---|---|---|
| Food | Yes | Percentage matches contract |
| Beverage (hosted bar, per drink or package) | Yes | Same percentage as food, unless stated otherwise |
| Labor (bartender, attendant, chef fees) | Often no, or at a different rate | Whether the contract excludes labor |
| Meeting room rental | Varies. Often no | Whether the contract says F&B only |
| AV equipment and labor | Varies. Some in-house AV adds its own | Whether the AV agreement adds a separate service charge |
| Room charges | No | No service charge on room revenue |
One banquet check, recalculated
In this example the service charge is taxable, and the hotel applied it to room rental as well as food.
Sample data · Illustrative
- Food and beverage subtotal
- $18,400.00
- Meeting room rental (not subject to service charge per contract p. 7)
- $3,000.00
- Correct service charge: 24% × $18,400
- $4,416.00
- Billed service charge: 24% × $21,400
- $5,136.00
- Service charge difference
- $720.00
- Plus tax on the difference at 8.1%
- $58.32
- Value requiring review
- +$778.32
How to audit service charge and tax
- 01
Find the contracted percentage
Usually in the F&B section of the contract, sometimes restated on each BEO. Check whether an addendum changed it.
- 02
Find the base
What the percentage applies to: food and beverage only, or other items as well.
- 03
Find the tax treatment
Whether the service charge is taxable where the event took place. Hotels often print this on the BEO. We can't advise on local tax law.
- 04
Recalculate one check
Subtotal the items subject to service charge, apply the percentage, then apply tax to the correct base.
- 05
Compare with every check
Once you know the method, check whether each banquet check follows it.
Terms
- Service charge
- A mandatory percentage the hotel adds to F&B, set out in the contract.
- Administrative fee
- The part of a service charge a hotel keeps. It may be listed separately.
- Gratuity
- A discretionary amount for staff, separate from any mandatory service charge.
- Taxable service charge
- Where local rules tax the service charge along with the food.
When the contract is silent
Some contracts state a service charge percentage but not what it applies to. In that case the hotel's standard practice fills the gap, and the audit question changes from "does it match the contract" to "is it applied consistently". If one banquet check charges service on labor and another doesn't, at least one of them is inconsistent.
This is also where the BEO helps. Many BEOs restate the service charge and its tax treatment for that function. When the BEO and the contract disagree, the later approved document usually governs, and when you can't tell which governs, the difference is a question to raise, not an error to assert.
FolioMatch handles this conservatively: where the documents don't establish the base or the rate, the finding is marked Needs review with both readings shown, rather than picking one.
Why the order of operations matters
Service charge and tax errors compound because of order. The correct sequence is usually: item subtotal, service charge on its contracted base, then tax on the subtotal plus the taxable portion of the service charge. Apply tax before the service charge, or service charge to the wrong base, and every banquet check is off by a different amount.
That compounding is why a one-percentage-point difference is worth chasing. On a single dinner it might be $50. Across fourteen functions, three days of breaks and a reception, the same method error can run into thousands. Recalculating one check by hand tells you which situation you're in.
Questions
Can a hotel raise the service charge after the contract is signed?
If your contract locks the percentage, the contracted percentage applies. Some contracts say "subject to change". Check the wording.
Why is tax charged on the service charge?
In many jurisdictions a mandatory service charge is part of the taxable sale. Check the tax note on your BEO or ask the hotel.
Does FolioMatch recalculate service charge?
Yes. When the contract states the percentage, FolioMatch compares billed service charges with it and shows the calculation. See BEO invoice reconciliation for how banquet checks are matched.
Is the service charge negotiable?
Before signing, often yes: the percentage, the base and whether it's locked are all negotiable points. After signing, the contract wording governs, which is why this audit starts with the contract.
Should I tip on top of the service charge?
That's your choice and outside the audit. What matters for the bill is that any gratuity you authorized appears once, at the amount you agreed.
Does service charge apply to the F&B minimum shortfall?
Check the contract. Some hotels charge service charge on a shortfall as if it were revenue; others don't. The wording decides, and it's worth reading before paying a shortfall line.
Related
Hotel master bill audit
Check the final master bill against the contract, BEOs and concessions. This is the hub for everything below.
BEO invoice reconciliation
Match each banquet check to its final BEO: menu prices, guarantees, staffing and revised versions.
Master bill reconciliation
The accounting method: the master account's structure, matching lines, and tying out deposits, credits and routing.
You negotiated the deal. Make sure you got it.
Upload your contract, BEOs and final hotel bill. FolioMatch shows what needs attention and the source evidence behind every finding.