The One Big Beautiful Bill Act (OBBBA, P.L. 119-21) created a federal income tax deduction — not exemption — of up to $25,000 on qualified tip income for 2025–2028. FICA (Social Security and Medicare) still applies to every dollar of tips. Ballotpedia counted 19 conforming states on May 28, 2026, but its August 10, 2026 update lists 10 conformed, 31 not conformed and Georgia partial, so any count depends on method and date - check your own state. California and Illinois do not conform — residents there owe state income tax on tips even if the federal deduction reduces their federal bill. New York did not pick up the deduction on 2025 returns, but its FY 2027 budget exempts up to $25,000 of tipped income for tax year 2026 (per the Governor's office).
At a glance
Key Facts
The OBBBA Tips Deduction: Core Mechanics
The OBBBA (One Big Beautiful Bill Act, P.L. 119-21) created a new deduction, claimed on Schedule 1-A, for qualified tip income reported on Form W-2, Form 1099 or Form 4137. Maximum deduction: up to $25,000 of qualified tip income per tax year. Phase-out: the deduction is reduced by $100 for each $1,000 by which modified adjusted gross income (MAGI) exceeds $150,000 (single filers) or $300,000 (married filing jointly), and is gone at $400,000 / $550,000. Availability: tax years 2025 through 2028 — the provision sunsets after 2028 and does not apply from 2029 onward unless Congress extends it. The deduction applies to federal income tax only. FICA (Social Security 6.2% + Medicare 1.45% = 7.65% employee share) continues to apply to all reported tip income without change.
State Conformity: Counts Vary by Source
States conform to the federal tips deduction through one of two mechanisms: (1) rolling conformity — the state's tax code automatically tracks changes to federal adjusted gross income (FAGI) as they are enacted; or (2) static conformity — the state conforms to a fixed date of federal law and must pass new legislation to conform to subsequent changes. Ballotpedia's May 28, 2026 brief reported that 19 of the 41 states that tax wages had conformed to the OBBBA tips deduction; its state-implementation page, as of August 10, 2026, lists 10 conformed, 31 not conformed and one partial (Georgia). The counts differ by method and date, and states keep acting, so verify with your state Department of Revenue. Confirmed from official sources: Arizona (HB 4168, tax years beginning from 2025), Hawaii (Act 35, tax years beginning after 2025) and New York (tax years beginning 2026) allow a tips deduction or subtraction; New Jersey, North Carolina and Illinois do not. Always verify with your state Department of Revenue before filing. Because the federal deduction is claimed below AGI, a state whose return starts from federal AGI does not pick it up automatically — it needs its own deduction or subtraction.
No-Income-Tax States: Federal Deduction Still Applies
Nine states have no broad-based state income tax: Alaska, Florida, Nevada, New Hampshire (no tax on wages; interest-and-dividends tax repealed from 2025), South Dakota, Tennessee, Texas, Washington, and Wyoming. For tipped workers in these states, the question of state conformity is moot — there is no state income tax from which to deduct tips. The federal OBBBA deduction still applies in full, reducing federal income tax. Tipped workers in these states benefit from the federal deduction without any state-level complication.
Non-Conforming States: California and Illinois; New York Changed for 2026
California: the Franchise Tax Board's 2025 Form 540 booklet says California does not conform to the OBBBA in general; California starts from federal AGI, which does not include the tips deduction, so tip income stays in California taxable income and no add-back is needed. New York: starts from federal AGI as well and did not pick up the deduction on 2025 returns; the FY 2027 budget (signed May 28, 2026) exempts up to $25,000 of tipped income for tax year 2026, according to the Governor's office. Illinois: starts from federal AGI and no Illinois adoption of the tips deduction has been identified, so tip income stays in Illinois base income. Residents of California and Illinois pay state income tax on tip income even when their federal tax is reduced.
Qualified Tipped Occupations: Who Qualifies
The deduction applies only to tip income received in occupations where tipping was customary and ordinary before December 31, 2024. Treasury and the IRS final regulations (IR-2026-49, April 2026) list more than 70 occupations in eight categories, including beverage and food service, hospitality and guest services, personal appearance and wellness, and transportation and delivery; check your own occupation on the list. Occupations where tipping was not customary before 2025 do not qualify — companies that began adding tip prompts to point-of-sale systems for previously non-tipped services after 2024 do not create a qualifying tipped occupation.
The Sunset: This Provision Expires After 2028
The OBBBA tips deduction is explicitly temporary. It applies to the 2025, 2026, 2027, and 2028 tax years only. For the 2029 tax year onward, the deduction no longer exists unless Congress passes new legislation to extend it. This is a critical planning point: the benefit is available for four tax years, not permanently. Workers and employers should not build long-term financial assumptions on the tips deduction remaining in force past 2028.
Introduction
No Tax on Tips 2026: Federal Deduction, State Conformity, and What Tipped Workers Actually Save
The One Big Beautiful Bill Act (OBBBA, P.L. 119-21), signed into law in 2025, introduced a headline-grabbing 'no tax on tips' provision. In practice it is a federal income tax deduction — not an exemption — of up to $25,000 per year on qualified tip income. Workers in traditionally tipped occupations (servers, bartenders, hairdressers, valets, and others where tipping was customary before 2025) can deduct eligible tips from their federal taxable income, reducing their federal income tax bill. Two things the provision does not change: Social Security and Medicare taxes (FICA) still apply to every dollar of tips, and the deduction sunsets after 2028. Whether the deduction also reduces state income tax depends entirely on whether your state has conformed to the federal change. Ballotpedia counted 19 conforming states on May 28, 2026 but lists only 10 (plus Georgia partially) in its August 10, 2026 update, so the count depends on method and date; check your own state. California and Illinois have not conformed, meaning tipped workers there still owe full state income tax on their tips; New York's return starts from federal AGI and did not pick up the deduction on 2025 returns, but its FY 2027 budget exempts up to $25,000 of tipped income for tax year 2026 (per the Governor's office). This guide explains the federal mechanics, maps state conformity, and addresses the FICA question that most workers get wrong.
Section 01
How the Federal No Tax on Tips Deduction Works
The OBBBA tips provision is technically a federal income tax deduction — not an exemption, not a credit, and not a repeal of tip taxation. Understanding the distinction matters for calculating your actual savings.
Deduction, Not Exemption
An exemption would remove tip income from gross income entirely. The OBBBA instead allows a deduction of up to $25,000 of qualifying tips. It is claimed on Schedule 1-A and entered on Form 1040 line 13b, so it reduces taxable income (not adjusted gross income) — the income subject to federal income tax. It does not affect gross wages for FICA purposes.
The $25,000 Annual Cap
The deduction is capped at $25,000 of qualified tip income per year. If you earned $18,000 in tips, you can deduct up to $18,000. If you earned $35,000 in tips, you can deduct only $25,000 — the remaining $10,000 is still subject to federal income tax. For many tipped workers the $25,000 cap covers their full tip income.
Phase-Out for Higher Earners
The deduction begins to phase out when modified AGI exceeds $150,000 for single filers or $300,000 for married filing jointly. The reduction is $100 for each $1,000 of excess, not dollar-for-dollar. A single filer with $165,000 MAGI can deduct a maximum of $23,500 (= $25,000 minus the $1,500 reduction for $15,000 of excess). The deduction is fully phased out at $400,000 MAGI (single) and $550,000 MAGI (MFJ). Most tipped workers earn well below these thresholds, so phase-out is rarely relevant in practice.
Tax Year Availability
The deduction is available for tax years 2025, 2026, 2027, and 2028 (it applies to 2025 returns) and does not automatically continue past 2028. Congressional action would be required to extend the provision.
Reporting Requirements Unchanged
The tips deduction does not change how tips are reported. Workers must still: report all tips to their employer monthly using Form 4070 if tips exceed $20 in a month; include all tip income on Form 1040; pay FICA on all reported tips. The deduction is claimed on Form 1040 after tips are fully reported — it reduces income tax, not the reporting obligation.
Section 02
States That Conform vs States That Don't
State-level treatment of the tips deduction varies significantly. Your state's position determines whether the federal deduction also reduces your state tax bill.
No-Income-Tax States: Conformity Is Moot
The following states have no broad-based state income tax, making the conformity question irrelevant for most workers. The federal tips deduction still reduces federal income tax for residents of these states:
Alaska — no state income tax
Florida — no state income tax
Nevada — no state income tax
New Hampshire — wages and tips not taxed at state level; its interest-and-dividends tax was repealed for tax periods beginning January 1, 2025
South Dakota — no state income tax
Tennessee — no state income tax (Hall Tax on investment income was fully repealed in 2021)
Texas — no state income tax
Washington — no state income tax on wages (note: capital gains tax enacted separately)
Wyoming — no state income tax
Tipped workers in these states benefit fully from the federal deduction with no state complications.
Conforming States: Federal Deduction Flows Through
A state conforms when its return starts from a federal figure that already reflects the deduction (such as federal taxable income) or when it enacts its own deduction or subtraction. A state that starts from federal adjusted gross income does not pick the deduction up automatically, because it is claimed below AGI (Schedule 1-A, Form 1040 line 13b). Ballotpedia counted 19 conforming states on May 28, 2026 but 10 (plus Georgia partially) in its August 10, 2026 update, so no single count is reliable; states confirmed from their own official sources include Arizona (tax years beginning from 2025), Hawaii (tax years beginning after 2025) and New York (tax years beginning 2026). In conforming states, the same $25,000 deduction that reduces your federal taxable income also reduces your state taxable income. The state tax savings equals your state income tax rate multiplied by the deductible tip amount. For a worker in a 5% flat-rate state who deducts $20,000 in tips, state tax savings = $1,000.
Non-Conforming States: Full State Tax Still Applies
Several large-population states have explicitly decoupled from the OBBBA tips deduction or have not acted to conform. In these states you pay full state income tax on all tip income (there is normally no add-back to compute, because the federal deduction is not part of the AGI the state starts from):
California — does not conform (FTB 2025 Form 540 booklet); tips taxed at full state rates
New York — tips were taxed at the full state rate on 2025 returns; the FY 2027 budget exempts up to $25,000 of tipped income for tax year 2026 (per the Governor's office)
Illinois — does not conform; tips remain in Illinois base income
New Jersey — the Division of Taxation says the federal tips, overtime and senior deductions do not affect the New Jersey return (page updated December 1, 2025)
North Carolina — the Department of Revenue's FAQ dated September 11, 2026 says the federal tips deduction cannot be taken on the 2025 North Carolina return because the General Assembly did not enact a state deduction
Other states may be in the process of legislating conformity or decoupling. State legislation in this area has been moving rapidly through 2026. Check your state's Department of Revenue website for the current position before filing.
Key Takeaway on State Conformity
Even in non-conforming states, the federal deduction still applies and still reduces federal income tax. Non-conformity means the deduction does not flow to state taxes — it does not cancel the federal benefit. A server in California earning $20,000 in tips still gets the full federal income tax deduction; they simply owe full California state income tax on those tips as well.
Section 03
California and New York: How These States Treat Tips
California and New York are the two states with the most consequential tip-tax questions given their large tipped-worker populations in hospitality, restaurants, and personal care services.
California's Decoupling History
California has a long-established practice of independently evaluating federal tax law changes and deciding whether to adopt them. The California Franchise Tax Board (FTB) and the California Legislature do not automatically follow federal changes — even when California's tax code technically starts from federal AGI. High-profile examples of California decoupling include: the TCJA's $10,000 SALT deduction cap (California allows full deduction on state return); the TCJA's increase to the standard deduction (California maintained its own lower standard deduction); various federal bonus depreciation rules. The OBBBA tips deduction follows this pattern — California did not enact conforming legislation. Because California starts from federal AGI, which does not include the tips deduction, tip income stays in California taxable income.
How California Starts From Federal AGI
On a California return for a server who earned $18,000 in tips: the federal tips deduction is claimed below AGI, so federal AGI still includes the $18,000 and California starts from that AGI with no reduction. The California income tax on $18,000 at California's marginal rate (varies by income level; ranges from 1% to 9.3% for most workers, with 10.3%–13.3% at higher incomes) is owed in addition to any federal income tax saved. For a server earning $18,000 in tips in California at an illustrative 6% marginal state rate, the state non-conformity costs approximately $1,080 in California tax compared to a conforming state.
New York's Position
New York's return starts from federal AGI, so the federal tips deduction did not carry into New York taxable income on 2025 returns. For tax year 2026, the FY 2027 budget (signed May 28, 2026) eliminates state income tax on up to $25,000 of tipped income, according to the Governor's office; confirm the form line and NYC treatment at tax.ny.gov. New York City also imposes a local income tax (3.078%–3.876% depending on income). Where no exemption applies, a server in New York City earning $20,000 in tips faces: federal income tax reduced by the OBBBA deduction; New York State income tax on the $20,000 at the marginal rate (5.4% at typical incomes); and New York City local income tax on the $20,000 (3.078%–3.876% marginal rate). Combined state and city tax on tips in NYC is roughly 9.3% at moderate income levels (5.4% + 3.876%).
Illinois's Flat-Rate Structure
Illinois taxes all income at a flat 4.95% state rate. Illinois does not conform to the OBBBA tips deduction, meaning tip income is taxed at the full 4.95% flat rate. Because Illinois starts from federal AGI, which does not include the tips deduction, no add-back is needed. For a bartender earning $22,000 in tips in Illinois, the state non-conformity costs approximately $1,089 in additional Illinois income tax (4.95% x $22,000).
Section 04
FICA Still Applies: Why You Still Pay Social Security on Tips
The single most commonly misunderstood aspect of the OBBBA tips provision is its interaction with FICA. The law's marketing as 'no tax on tips' creates a widespread misconception that all payroll taxes on tips are eliminated. They are not.
What FICA Covers
FICA (Federal Insurance Contributions Act) consists of two taxes: Social Security tax at 6.2% (employee share) on wages up to the annual wage base ($184,500 for 2026), and Medicare tax at 1.45% (employee share) on all wages with no cap. The combined employee FICA rate is 7.65%. Employers match the employee FICA contribution, paying an additional 7.65% on the same wages. FICA finances Social Security retirement and disability benefits and Medicare health coverage.
FICA on Tips Is Unchanged
The OBBBA tips deduction applies exclusively to federal income tax. It has zero effect on FICA. Tips that are reported to your employer are added to your FICA wage base, and FICA taxes are withheld on the full reported tip amount — exactly as before the OBBBA. There is no phase-in, no partial relief, no scheduled FICA change in the OBBBA legislation. A server earning $22,000 in tips in 2026 will still see $1,364 withheld for employee Social Security on those tips (6.2% x $22,000), plus $319 for employee Medicare (1.45% x $22,000) — $1,683 in total employee FICA on tips alone, unchanged from prior years.
The Net Tax Picture
For a single filer server earning $35,000 in wages plus $20,000 in tips (total income $55,000), the approximate 2026 federal tax picture after the OBBBA deduction:
Federal income tax: 2026 taxable income is $55,000 − $16,100 standard deduction − $20,000 tips deduction = $18,900, so federal income tax is $2,020 (versus $4,420 without the deduction)
Employee Social Security: 6.2% x $55,000 = $3,410 (unchanged; tips included in full)
Employee Medicare: 1.45% x $55,000 = $798 (unchanged)
Federal income tax savings from tips deduction: $2,400 ($20,000 × 12%, since the deduction sits in the 12% bracket)
The income tax savings are real and meaningful. But the FICA bill on tips is fully intact. Workers who were told 'you won't pay any tax on tips' should understand this clearly before making financial decisions.
Self-Employed Tipped Workers: Self-Employment Tax Still Applies
Self-employed workers (1099) who receive tips pay self-employment tax (SE tax) at 15.3% on net earnings up to the Social Security wage base — the combined employer and employee share. The OBBBA tips deduction reduces income tax for self-employed tipped workers, but SE tax on tip income continues unchanged. Self-employed tipped workers may deduct half of SE tax as an above-the-line deduction, as always.
Section 05
Who Qualifies for the Tips Deduction? Occupation Requirements
Not all tip income qualifies for the OBBBA deduction. The law restricts the deduction to occupations in which tipping was customary and ordinary practice before January 1, 2025. Treasury and the IRS published final regulations in April 2026 (IR-2026-49) listing more than 70 qualifying occupations in eight categories.
Clearly Qualifying Occupations
Occupations in the following categories are generally covered, subject to the Treasury list and the voluntary-tip rules:
Food and beverage service: Servers, bartenders, bussers, food runners, baristas at coffee shops, counter service staff at restaurants and cafes where tips are accepted
Personal care services: Hairdressers, barbers, nail technicians, estheticians, massage therapists, spa workers — occupations in the personal care services industry where tipping has been the longstanding norm
Transportation and delivery: Taxi drivers, rideshare drivers (Uber, Lyft), delivery drivers where tips are customarily given, valet parking attendants
Hotel and accommodation: Bellhops, hotel concierge staff, housekeeping staff where tips are customarily provided
Casino workers: Dealers and other casino floor workers who receive tips (tokes) from players — tips are a longstanding and customary part of casino floor compensation
Occupations That Do Not Qualify
The pre-2025 customary tipping requirement specifically excludes occupations where tipping was not standard before 2025, regardless of whether tip prompts are added to payment systems now. Specifically excluded:
Any occupation where tipping began primarily because of post-2024 point-of-sale tip prompts (the 'tip creep' phenomenon at service counters, retail, etc.)
Professional services (lawyers, accountants, consultants) — even if some clients leave tips
Healthcare workers (nurses, home health aides) — tips from patients are not a customary pre-2025 practice in the IRS sense
Retail workers — even where tip jars or prompts exist, retail is not a customarily tipped occupation
Mixed-Occupation Workers
Some workers receive tips in a qualifying occupation alongside other income. Only the tip income from the qualifying occupation is eligible for the deduction. A worker who bartends three nights a week (qualifying) and works a retail job two days a week (not qualifying) can deduct only tips from the bartending role. Proper record-keeping is essential — separate tip records by job if you work multiple positions.
Employer Reporting Is Still Required
The qualification for the deduction does not override tip reporting obligations. All tips of $20 or more in a month must be reported to your employer via Form 4070. Employers include reported tips in Box 1 and Box 7 of Form W-2. The tips deduction is then claimed on Form 1040 — it does not operate by excluding tips from W-2 reporting.
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There are two categories to consider. States with no income tax at all (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming) have no state income tax on tips — the federal OBBBA deduction still applies to reduce federal tax. States that conform to the OBBBA tips deduction (the count varies by source; Arizona, Hawaii and New York are confirmed from official sources) allow the same federal deduction to flow through to state taxes. States that do not conform — most notably California and Illinois — still impose full state income tax on tips even when the federal deduction applies; New York exempts up to $25,000 of tipped income from tax year 2026 (per the Governor's office). Check your state's Department of Revenue website for the latest position, as conformity legislation has been moving quickly.
Q
Does no tax on tips apply to FICA (Social Security and Medicare)?
No. The OBBBA tips deduction applies to federal income tax only. FICA — Social Security (6.2%) and Medicare (1.45%) — continues to apply to all reported tip income, exactly as before the OBBBA. The combined employee FICA rate on tips remains 7.65%. There is no phase-in or partial relief from FICA in the tips provision. Workers who hear 'no tax on tips' should be aware that their paycheck will still show FICA withholding on tip income — only the federal income tax component is reduced.
Q
How much can I deduct under the no tax on tips rule?
Up to $25,000 of qualified tip income per tax year (2025, 2026, 2027, and 2028). If your total tips are below $25,000, you can deduct the full amount. If your tips exceed $25,000, only $25,000 is deductible. The deduction is reduced by $100 for each $1,000 by which your modified AGI exceeds $150,000 (single) or $300,000 (married filing jointly). For most tipped workers, who earn well below those thresholds, the full deduction applies on all tips up to $25,000. The deduction reduces federal taxable income — the actual tax savings depends on your marginal federal income tax rate.
Q
Does California have no tax on tips?
No. California does not conform to the OBBBA tips deduction. California starts from federal AGI, which does not include the tips deduction, so full tip income stays in California taxable income. They owe full California state income tax on all tip income at their applicable California marginal rate (1%–13.3% depending on income). The federal deduction still applies and reduces their federal income tax — the non-conformity only affects the state bill. California has a long history of decoupling from federal tax changes it does not separately enact.
Q
When does the no tax on tips provision expire?
The OBBBA tips deduction sunsets after the 2028 tax year. It applies to tax years 2025 through 2028 only. For 2029 and later years, the deduction no longer exists unless Congress passes legislation to extend it. This is a temporary provision — workers and employers should not plan on it being permanent. The deduction is available for four tax years: 2025 (returns filed in 2026), 2026 (spring 2027), 2027 (spring 2028), and 2028 (spring 2029).
Q
Do I still need to report tips to my employer?
Yes. The OBBBA tips deduction does not change tip reporting obligations. If you receive $20 or more in tips in any calendar month, you must report the total to your employer by the 10th of the following month using Form 4070 (or an equivalent written statement). Your employer uses reported tip amounts to calculate FICA withholding and to include tips in Box 1 and Box 7 of your W-2. The tips deduction is then claimed on Form 1040 after tips are fully reported — failure to report tips to your employer does not exempt them from FICA and can result in penalties. Unreported tips that the IRS later identifies are still subject to all applicable taxes plus interest and penalties.
Disclaimer:This guide provides general tax information for educational purposes only. The OBBBA tips deduction is a temporary provision (2025–2028 tax years) and is a deduction from federal income tax only — FICA (Social Security and Medicare) continues to apply to all reported tip income without change. State conformity counts are from Ballotpedia (May 28, 2026 brief; August 10, 2026 state-implementation page), supplemented by each state's official sources where named — state legislation is moving rapidly and states may have conformed or decoupled since. Always verify current conformity status with your state's Department of Revenue before filing. This is not tax, legal, or financial advice. Consult a qualified tax professional for advice specific to your situation.