Why did the restaurant suggest I tip on the tax?

It varies greatly based on the POS system that they’re using and how they have it configured. Modern POS systems can be incredibly complicated, and restaurant owners rarely have time to figure out how to customize them. Some owners configure their system and specify what suggested tip percentage to display and which number to base it on. Many others are doing good to get the blasted thing to work in the first place and leave it with the manufacturer’s default settings. I’ve been to places where the owner wasn’t even aware that their new POS system printed a "suggested tip" line on the receipt, or where two different registers were set to use two different suggested tip percentages. In some places, you can see the suggested tip percentage change based on how much you spent, what you ordered (liquor sometimes assumes a higher tip), or how large your party is (large groups sometimes result in a 30-35% suggested tip). They’re all just arbitrary suggestions, so never feel bad ignoring them and going with whatever amount you feel is right.

In any case, a good general rule is to just take the sales tax amount and double it (I’ll go triple if the tax rate is under 7%). That will land you in normal tipping range and multiplying by two is much easier to do in your head than calculating percentages.

I don’t know that the restaurant has put this much thought into things, but if you tip on the before-tax amount, you must now add up three things (before-tax total, tip, and tax) to get the final amount you are paying. If you tip on the after-tax amount, you only need to add up two things.

People generally do the math for tipping by hand, so keeping it simple is probably more reliable and less intimidating.

(One of the reasons for putting that recommended tip on the bill is to reduce friction and make it more likely for you to pay that amount. Calculating a 10% tip in your head is easy, 15% is a little harder, but 18% no one will do without pulling out a calculator.)

USA is a big outlier in that prices are usually published without tax. In Europe, you wouldn’t ever see the price without tax, the price including tax will be the price quoted on the menu, and anyone giving a ten percent tip will calculate based on the number (including tax) on the bill.

As others have said, this is a suggested tip. Having known people who have worked in food service, I’ve been told to tip on the total amount, since in some locales in the United States, restaurant workers are paid literally $2.13 per hour by the restaurant and every penny counts.

In Canada, when paying with a card, the credit card machine brought to the table can add a percentage tip, which is always on the total amount. (The machine never sees the subtotal before tax, since the server only enters the total.) This is also the case for such machines in the United States, but there it is substantially more common to have the card taken away and for you to write the tip in on the slip instead of having a machine brought to the table. Thus, tipping on the total amount is customary in at least some places.

Ultimately, these are suggested values, and you can leave whatever you like. Gratuities are legally optional. I usually leave 20% if the service is good, since it’s not that much money for me but it adds up for the server. However, again, you can do something else if you like or choose to tip on the subtotal.

I always heard the exact opposite ~ That you’re not supposed to tip on tax.

However, I almost always tip 25% of the total amount of the bill ~ Unless there was a very good reason to leave a lower tip.

Tipping is a personal choice. How you come to the number doesn’t really matter. What matters in the USA is that virtually all wait staff expect some tip. The typical suggestion is 10-20%, or no tip if it was a really bad experience. If you think your tip was fair, then your tip was fair. The social morés of tipping can be difficult, so if you have trouble consider this solution from Dick Solomon.

Personally, (as an American) I have always tipped on the total of the bill. The way printed receipts are laid out, this seems to be encouraged because the big number at the bottom will be the total, with the line under that for writing the tip (presumably based on the total right above it). I don’t think there’s a nefarious scheme to get you to tip more so much as it’s just easier to look at the big number at the bottom rather than try to pick out the pre-tax subtotal (in smaller numbers, a couple of lines further up), and whoever designed the automatic tip suggestion did the same thing: grabbed the total, not the subtotal.

But as everyone says in the comments, this is all just a suggestion anyway.

Personally, though, I err on the side of "too high", especially if it’s a restaurant I frequent. My reasoning is this: if I go out to eat twice a week = 104 times a year and if I tip $2 extra each and every time that’s $208/year. Eating out 104 times per year and $2 extra is surely well above average but even so, $208/year is not going to lead to my early retirement or a vacation home in Tahiti so really why sweat it. It’ll probably make some server slightly happier and costs me little enough to not matter in the long run. I think it’s kind of a "penny-wise, dollar-foolish" concept. Plan hard for big investments like your house, your car, your retirement fund, etc, and don’t worry over much about a little extra on a tip, is my personal philosophy. I typically tip 20%, and round up to the nearest dollar, because shaving off an extra 32 cents or whatever here and there is really not worth the bother.

You aren’t "paying a tip on your tax". All the percentages and amounts are just ‘suggestions". You can ignore them and pay whatever you want and make up your own percentage calculations.

Why are they doing this? For the US style approach where the suggestions are printed on a receipt for you to sign the answer is simple. It’s because they want you to give them more money.

For the case outside the US where the server enters the total into a POS terminal, then the POS terminal doesn’t know the amount before tax. It has no way to calculate a percentage of any other amount.