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Service Charge Tax Calculation

Introduction​

This article provides advanced information about tax calculation on orders that include service charges. See Service Charges and Tips for basic information on service charges.

Glossary​

TermDefinition
Tax-Inclusive PricingA pricing model where the menu price already includes tax, meaning tax is calculated backward to determine the net price and tax portion.
Tax-Exclusive PricingA pricing model where tax is added on top of the menu price. When the items in the order are taxable, the total price is higher than the menu price.
Menu PriceThe listed price of an item before any service charges or tax calculations. In a tax-inclusive model, this price includes tax; in a tax-exclusive model, tax is added separately.
Net Item PriceThe price of an item before tax is applied. In a tax-exclusive scenario, it is equal to the menu price. In a tax tax-inclusive environment, its is calculated by subtracting the tax and service charge amounts (if applicable) from the menu price.
Service ChargeAn additional fee applied to a bill, which may or may not be subject to tax.
Untaxed Service ChargeA service charge that is not included in the taxable amount, meaning tax applies only to the net item price.
Tax Apportioned Service ChargeA service charge that inherits the tax of the items in the order, meaning tax is applied to both the net item price and the service charge.
Subtotal (Before Tax)The sum of the net item price and service charge, before applying tax.
Tax AmountThe portion of the total price that represents tax, calculated based on either the net item price alone or both the net price and service charge.
Total PriceThe final amount a customer pays, including item price, service charge, and tax.
Tax RateThe percentage of tax applied to a taxable amount (e.g., 20%).
Taxable AmountThe portion of a total bill on which tax is calculated, which may include both the net item price and the service charge, depending on tax rules.

Detailed Breakdown - Tax Inclusive Environments​

In the following examples of tax calculation in a tax inclusive environment, the service charge is calculated on top of the tax-inclusive item price. The example item has a menu price of $10 with a 20% tax and a 10% service charge. The total will be fixed at $11.00 in both scenarios.

Scenario 1: Untaxed Service Charge​

In this scenario, the service charge is not taxed, and the tax is calculated only on the item's net price.

Step-by-Step Calculation:​

  1. Split the total into item price and service charge

    • The service charge is 10% of the menu price ($10):
      • Service charge = 10 x 0.10 = 1.00
    • Subtract the service charge from the total:
      • Menu Price (Price for item, including tax) = 11.00 - 1.00 = 10.00

  2. Break down item price and tax

    • The item's menu price includes a 20% tax, so divide $10.00 by (1 + 0.20):
      • Net item price = Menu Price/ 1+ Tax Rate = 10.00/1.20 = 8.33
    • Calculate the tax on the net item price:
      • Tax amount = 8.33 x 0.20 = 1.67

  3. Add everything together

    • Net item price = $8.33
    • Tax = $1.67
    • Service charge = $1.00
    • Total = $8.33 + $1.67 + $1.00 = 11.00

Scenario 2: Tax Apportioned Service Charge​

In this scenario, the service charge is included in the taxable amount, so the tax is calculated on both the item's net price and the service charge.

Step-by-Step Calculation:​

  1. Calculate the taxable amount and the net item price

    • The total price ($11) includes the net item price, the service charge, and the tax.

    • Calculate the taxable amount:

      • Taxable amount = Total/1 + Tax rate = 11.00/1.20 = 9.17

    • The taxable amount already includes the service charge ($1.00), so:

      • Net item price = Taxable Amount - Service Charge = 9.17 - 1.00 = 8.17

  2. Calculate the tax amount

    • Tax is 20% of the taxable amount ($9.17):

      • Tax amount = 9.17 x 0.20 = 1.83

  3. Add everything together

    • Net item price = $8.17
    • Service charge = $1.00
    • Tax = $1.83
    • Total = $8.17 + $1.00 + $1.83 = 11.00

Summary Table​

Both methods result in the same total of $11.00, but the way the tax is calculated differs depending on whether the service charge is included in the taxable amount.

ComponentUntaxed Service ChargeTax Apportioned Service Charge
Net item price$8.33$8.17
Service charge$1.00 (not taxed)$1.00 (taxed)
Tax amount$1.67$1.83
Total$11.00$11.00

Detailed Breakdown - Tax Exclusive Environments​

In the following examples of tax calculation in a tax-exclusive environment, the service charge is calculated on the item's net price before tax (menu price).

The example item has a menu price of $10 with a 20% tax and a 10% service charge. Since tax is applied on top of the subtotal, the final price will differ based on whether the service charge is taxed.

Scenario 1: Untaxed Service Charge​

In this scenario, the service charge is not taxed, and the tax is calculated only on the item's net price.

Step-by-Step Calculation:​

  1. Determine the service charge and item price

    • The service charge is 10% of the menu price ($10):
      • Service charge = 10 x 0.10 = 1.00
    • The item's menu price is already tax-exclusive:
      • Net item price = $10.00

  2. Calculate the tax amount

    • The tax (20%) is applied only to the net item price ($10.00):
      • Tax amount = 10.00 x 0.20 = 2.00

  3. Add everything together

    • Net item price = $10.00
    • Tax = $2.00
    • Service charge = $1.00
    • Total = $10.00 + $2.00 + $1.00 = 13.00

Scenario 2: Tax Apportioned Service Charge​

In this scenario, the service charge is included in the taxable amount, meaning tax is applied to both the item's price and the service charge.

Step-by-Step Calculation:​

  1. Determine the service charge and item price

    • The service charge is *0% of the menu price ($10):
      • Service charge = 10 x 0.10 = 1.00
    • The item's menu price is already tax-exclusive:
      • Net item price = $10.00
    • The total taxable amount is the sum of the item price and the service charge:
      • Taxable amount = 10.00 + 1.00 = 11.00

  2. Calculate the tax amount

    • The tax (20%) is applied to the taxable amount ($11.00):
      • Tax amount = 11.00 x 0.20 = 2.20

  3. Add everything together

    • Net item price = $10.00
    • Service charge = $1.00
    • Tax = $2.20
    • Total = $10.00 + $1.00 + $2.20 = 13.20

Summary Table​

Both methods result in different total amounts because, in the tax-exclusive model, tax is added on top instead of being embedded in the price.

ComponentUntaxed Service ChargeTax Apportioned Service Charge
Net item price$10.00$10.00
Service charge$1.00 (not taxed)$1.00 (taxed)
Tax amount$2.00$2.20
Total$13.00$13.20

Comparison Table​

This table compares the tax calculations for both tax-inclusive and tax-exclusive environments under two scenarios:

  1. Untaxed Service Charge – The service charge is not taxed, and tax applies only to the item's net price.
  2. Tax Apportioned Service Charge – The service charge is included in the taxable amount, meaning tax applies to both the item and the service charge.
ComponentTax-Inclusive: Untaxed Service ChargeTax-Inclusive: Tax Apportioned Service ChargeTax-Exclusive: Untaxed Service ChargeTax-Exclusive: Tax Apportioned Service Charge
Net item price$8.33$8.17$10.00$10.00
Service charge %10%10%10%10%
Service charge$1.00 (not taxed)$1.00 (taxed)$1.00 (not taxed)$1.00 (taxed)
Subtotal (Before Tax)$9.33$9.17$11.00$11.00
Tax %20%20%20%20%
Tax amount$1.67$1.83$2.00$2.20
Total$11.00$11.00$13.00$13.20
Take Note
  • In tax-inclusive environments, the total remains fixed and tax is calculated backward from the total.
  • In tax-exclusive environments, tax is added on top of the net amounts, leading to a higher total when the service charge is taxable.

Example Financial API Data - Tax Inclusive Account​

{
        "accountReference": "DnxmZU38RY28dHgy4W__Qw==",
        "accountFiscId": "A75074.8",
        "receiptId": "R75074.8",
        "source": {
            "initialAccountId": "A75074.8"
        },
        "salesLines": [
            {
                "id": "S75074.15",
                "totalNetAmountWithTax": "11.00",
                "totalNetAmountWithoutTax": "8.33",
                "menuListPrice": "10.00",
                "unitCostPrice": "0.00",
                "serviceCharge": "1.00",
                "serviceChargeRate": "10.00",
                "discountAmount": "0.00",
                "taxAmount": "1.6667",
                "taxCode": "VAT20",
                "taxRatePercentage": "20.00",
                "taxLines": [
                    {
                        "taxId": "41910290874374",
                        "taxCode": "VAT20",
                        "taxRate": "1.2",
                        "taxAmount": "1.666667",
                        "taxIncluded": true
                    }
                ],
                "accountDiscountAmount": "0.00",
                "totalDiscountAmount": "0.00",
                "sku": "13",
                "name": "Burger",
                "statisticGroup": "Food",
                "quantity": "1.000",
                "accountingGroup": {
                    "accountingGroupId": 41910290874411,
                    "name": "Food"
                },
                "currency": "GBP",
                "tags": [],
                "categories": [
                    {
                        "category": "default",
                        "value": "Food"
                    }
                ],
                "timeOfSale": "2023-07-07T15:37:52.326Z",
                "deviceId": 75074,
                "deviceName": "iPad1"
            },
            {
                "id": "S75074.16",
                "totalNetAmountWithTax": "5.50",
                "totalNetAmountWithoutTax": "4.17",
                "menuListPrice": "5.00",
                "unitCostPrice": "0.00",
                "serviceCharge": "0.50",
                "serviceChargeRate": "10.00",
                "discountAmount": "0.00",
                "taxAmount": "0.8333",
                "taxCode": "VAT20",
                "taxRatePercentage": "20.00",
                "taxLines": [
                    {
                        "taxId": "41910290874374",
                        "taxCode": "VAT20",
                        "taxRate": "1.2",
                        "taxAmount": "0.833333",
                        "taxIncluded": true
                    }
                ],
                "accountDiscountAmount": "0.00",
                "totalDiscountAmount": "0.00",
                "sku": "14",
                "name": "Bagel",
                "statisticGroup": "Food",
                "quantity": "1.000",
                "accountingGroup": {
                    "accountingGroupId": 41910290874411,
                    "name": "Food"
                },
                "currency": "GBP",
                "tags": [],
                "categories": [
                    {
                        "category": "default",
                        "value": "Food"
                    }
                ],
                "timeOfSale": "2023-07-07T15:37:53.464Z",
                "deviceId": 75074,
                "deviceName": "iPad1"
            }
        ],
        "payments": [
            {
                "code": "CASH",
                "description": "Cash",
                "paymentMethodId": 41910290874392,
                "netAmountWithTax": "16.50",
                "currency": "GBP",
                "tip": "0.00",
                "type": "NORMAL",
                "deviceId": 75074,
                "deviceName": "iPad1",
                "fiscId": "T75074.8",
                "uuid": "fryjerL6QAKwrkUcyMenmg==",
                "fiscDate": "2023-07-07T15:38:02.841Z"
            }
        ],
        "timeOfOpening": "2023-07-07T15:37:49.468Z",
        "timeOfCloseAndPaid": "2023-07-07T15:38:02.862Z",
        "tableName": "",
        "type": "SALE",
        "nbCovers": 0.0,
        "dineIn": true,
        "deviceId": 75074,
        "deviceName": "iPad1"
}

Example Financial API Data - Tax Exclusive Account​

{
        "accountReference": "wwRUIsxdTzqeO_m38KoV3w==",
        "accountFiscId": "A75125.3",
        "receiptId": "R75125.3",
        "source": {
            "initialAccountId": "A75125.3"
        },
        "salesLines": [
            {
                "id": "S75125.5",
                "totalNetAmountWithTax": "11.00",
                "totalNetAmountWithoutTax": "10.00",
                "menuListPrice": "10.00",
                "unitCostPrice": "0.00",
                "serviceCharge": "1.00",
                "serviceChargeRate": "10.00",
                "discountAmount": "0.00",
                "taxAmount": "1.4975",
                "taxCode": "MULTI",
                "taxRatePercentage": "14.98",
                "taxLines": [
                    {
                        "taxId": "141948669132806",
                        "taxCode": "GST5",
                        "taxRate": "1.05",
                        "taxAmount": "0.5",
                        "taxIncluded": false
                    },
                    {
                        "taxId": "141948669132805",
                        "taxCode": "PST9_975",
                        "taxRate": "1.09975",
                        "taxAmount": "0.9975",
                        "taxIncluded": false
                    }
                ],
                "accountDiscountAmount": "0.00",
                "totalDiscountAmount": "0.00",
                "sku": "52",
                "name": "Hamburger",
                "statisticGroup": "Food",
                "quantity": "1.000",
                "accountingGroup": {
                    "accountingGroupId": 141948669132845,
                    "name": "Food"
                },
                "currency": "CAD",
                "tags": [],
                "categories": [
                    {
                        "category": "default",
                        "value": "Food"
                    }
                ],
                "timeOfSale": "2023-07-07T22:46:21.913Z",
                "deviceId": 75125,
                "deviceName": "iPad9"
            },
            {
                "id": "S75125.6",
                "totalNetAmountWithTax": "5.50",
                "totalNetAmountWithoutTax": "5.00",
                "menuListPrice": "5.00",
                "unitCostPrice": "0.00",
                "serviceCharge": "0.50",
                "serviceChargeRate": "10.00",
                "discountAmount": "0.00",
                "taxAmount": "0.7488",
                "taxCode": "MULTI",
                "taxRatePercentage": "14.98",
                "taxLines": [
                    {
                        "taxId": "141948669132806",
                        "taxCode": "GST5",
                        "taxRate": "1.05",
                        "taxAmount": "0.25",
                        "taxIncluded": false
                    },
                    {
                        "taxId": "141948669132805",
                        "taxCode": "PST9_975",
                        "taxRate": "1.09975",
                        "taxAmount": "0.49875",
                        "taxIncluded": false
                    }
                ],
                "accountDiscountAmount": "0.00",
                "totalDiscountAmount": "0.00",
                "sku": "FT1",
                "name": "Bagel",
                "statisticGroup": "Food",
                "quantity": "1.000",
                "accountingGroup": {
                    "accountingGroupId": 141948669132845,
                    "name": "Food"
                },
                "currency": "CAD",
                "tags": [],
                "categories": [
                    {
                        "category": "default",
                        "value": "Food"
                    }
                ],
                "timeOfSale": "2023-07-07T22:46:22.509Z",
                "deviceId": 75125,
                "deviceName": "iPad9"
            }
        ],
        "payments": [
            {
                "code": "CASH",
                "description": "Cash",
                "paymentMethodId": 141948669132824,
                "netAmountWithTax": "18.75",
                "currency": "CAD",
                "tip": "0.00",
                "type": "NORMAL",
                "deviceId": 75125,
                "deviceName": "iPad9",
                "fiscId": "T75125.3",
                "uuid": "0nklrXGuQmuWVA8bTywGvQ==",
                "fiscDate": "2023-07-07T22:46:41.055Z"
            }
        ],
        "timeOfOpening": "2023-07-07T22:44:54.199Z",
        "timeOfCloseAndPaid": "2023-07-07T22:46:41.067Z",
        "tableName": "",
        "type": "SALE",
        "nbCovers": 0.0,
        "dineIn": true,
        "deviceId": 75125,
        "deviceName": "iPad9"
}