It has become customary for restaurants to tack on a 18% tip to the check of large parties where eight or more are dining together.  However, a new tax law has many restaurants re-thinking this policy.

According to the Wall Street Journal, an update of the current tax rule will make automatic tips taxable by the government.  That means the restaurant will have to pay those taxes.

Some large restaurant chains have already reported that they will be dropping the automatic tip, including Darden Restaurant Group. Darden is the parent company of Olive Garden, Red Lobster, LongHorn Steakhouse, Seasons 52, Bahama Breeze and The Capital Grille.

The change will dramatically effect waitstaff, who already work for less than minimum wage and rely on tips to make up the difference.

Secondly, everyone in the group might not tip consistently with the 15-18% guideline.  The policy ensured that waitstaff was fairly reimbursed for their extra work.  The policy of adding a tip to the check of large parties came into effect for two reasons: it is more work for the waitstaff to serve large parties, keeping track of lots of different orders and often requiring a split-check.

On the other hand, knowing that the tip was guaranteed might negatively effect the amount of attention the large group received.  If you know you will get a good tip regardless of effort, why try so hard to please?  Motivation is intrinsically linked to possible reward.

One thing is clear: restaurants are passing the tax burden on to their waitstaff, rather than face stiffer taxes themselves.   If a restaurant decides to add a tip to the check, the government will now consider that a “service charge,” and it will be subject to taxes.

Even so, many servers are likely to be in favor of the new policy, because they don’t want their tips subject to payroll taxes and withholding.  While tips are distributed nightly, payroll is not, and taxes are withheld automatically from income, not from tips.  It is up to the waiter to report tips to the IRS.

In an attempt to encourage customers to tip their servers, Darden Restaurants have introduced a new check that calculates the suggested amount on each ticket.  Suggested amounts for 15%, 18% and 20% will appear on the bottom of each diner’s receipt.  It will be up to the customer to decide what amount to write on the final check, however.

The next time you are out with a large group of friends, don’t forget to tip your waiter!