No Tax on Tips 2026: Which States Conform? Full List

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. As of May 28, 2026, 19 states had conformed. Several major-population states — including California, New York, and Illinois — have explicitly decoupled, meaning tipped workers there still owe full state income tax on their tips. This guide explains the federal mechanics, maps state conformity, and addresses the FICA question that most workers get wrong.

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 an above-the-line deduction — meaning you reduce your adjusted gross income (AGI) by the qualifying tip amount, up to $25,000. The deduction appears on your Form 1040 and reduces 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 most tipped workers, who average $15,000–$22,000 annually in tips according to BLS data, 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 phase-out is dollar-for-dollar: every $1 of AGI above the threshold reduces the available deduction by $1. A single filer with $165,000 MAGI can deduct a maximum of $10,000 (= $25,000 minus $15,000 phase-out). Above $175,000 MAGI (single), the deduction is fully phased out. Above $325,000 MAGI (MFJ), the deduction is fully phased out. 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 2026, 2027, and 2028. It does not apply retroactively to 2025 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.

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 — taxes interest and dividends only; wages and tips not taxed at state level
• 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

States that use federal adjusted gross income (FAGI) as the starting point for state taxable income automatically conform when federal law reduces FAGI — no separate state legislation required. As of May 28, 2026, 19 states had conformed to the OBBBA tips deduction (Ballotpedia). 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 must add back the federal tips deduction on your state return — you pay full state income tax on all tip income:

• California — does not conform; add-back required on Schedule CA
• New York — does not conform; tips taxed at full state rate
• Illinois — does not conform; add-back required on IL-1040

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.

California and New York: Why These States Don't Conform

California and New York are the two most consequential non-conforming states 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, and the FTB has indicated the add-back applies. California tipped workers complete Schedule CA (540) and add back the federal tips deduction amount in the income adjustments column, restoring the tip income to California taxable income.

How the California Add-Back Works

On a California return for a server who earned $18,000 in tips: Federal AGI is reduced by the $18,000 tips deduction. California starts from the same federal AGI — but then Schedule CA adds back $18,000 in the income adjustments additions column. California taxable income = federal taxable income + $18,000. 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 a 6% marginal state rate, the state non-conformity costs approximately $1,080 in additional California tax compared to a conforming state.

New York's Position

New York similarly does not conform to the OBBBA tips deduction. New York uses its own modifications to federal AGI and has not passed legislation incorporating the tips deduction into New York's tax code. New York City imposes an additional local income tax (3.078%–3.876% depending on income), making the effective state+local marginal rate on tips in NYC substantially higher than in most of the country. A server in New York City earning $20,000 in tips faces: no federal income tax on up to $20,000 of tips (OBBBA deduction); full New York State income tax on the $20,000 (4%–6.85% marginal rate); full 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 can reach 10%+ at moderate income levels.

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. Illinois residents complete the IL-1040 Schedule M add-back for the federal tips deduction. 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).

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 ($176,100 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: calculated on $35,000 (the $20,000 tip deduction reduces the $55,000 income base to $35,000)
• 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: approximately $2,200–$2,400 depending on standard deduction and other factors

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.

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. The IRS issued guidance (FS-2026-01) describing the qualifying categories.

Clearly Qualifying Occupations

The following occupations have historically involved customary tipping and are covered by the OBBBA deduction:

• 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.