No tax on tips in New York: keep up to $25,000 tax-free.
Two new laws — Washington’s deduction and Albany’s exemption — stack on the same tip dollar in 2026. Here’s who qualifies, what it actually saves, and what still gets taxed.
Federal $2,400NY State $1,080NYC $766
What Is No Tax on Tips in New York?
Starting with tax year 2026, New York State lets tipped workers subtract up to $25,000 of tip income from their state taxes — on top of the new federal deduction of up to $25,000 on the same tips. Two laws, one tip dollar, taxed by neither.
The federal piece arrived first: the One Big Beautiful Bill Act, signed July 4, 2025, created a deduction for qualified tips for tax years 2025 through 2028. New York followed in its 2026 budget — signed May 28, 2026 — with a state exemption that mirrors the federal one: your New York adjusted gross income drops by the same tip amount, up to $25,000, beginning with the 2026 tax year.
The headline example: a NYC server earning $40,000 in wages plus $20,000 in tips keeps $4,245 more per year under the new rules — $2,400 less federal tax, $1,080 less state tax, $766 less city tax. That’s $354 a month back in your pocket. The catch everyone should know up front: Social Security and Medicare taxes still apply to every tip dollar. This is an income-tax break, not a payroll-tax break.
Washington First: the $25,000 Federal Deduction
New Section 224 of the tax code lets workers in tipped occupations deduct up to $25,000 of qualified tips per tax return — single and joint filers share the same $25,000 cap. It’s available for tax years 2025 through 2028 (retroactive to January 1, 2025; gone for years after 2028 unless Congress extends it), and you can claim it even if you take the standard deduction — it goes on the new Schedule 1-A.
Two limits matter. First, the income phaseout: the deduction shrinks by $100 for every $1,000 your modified adjusted gross income exceeds $150,000 single / $300,000 joint — fully gone around $400,000 single. Second, the occupation test: your job must be one that customarily and regularly received tips on or before December 31, 2024 — servers, bartenders, barbers, delivery drivers, and the like. The IRS proposed regulations (September 2025) explicitly shut out specified service trades like law, medicine, accounting, finance, and consulting.
The tips themselves must be voluntary, non-negotiated, and reported — on your W-2 or 1099. Mandatory service charges don’t count. One quirk worth knowing: the deduction is “below the line,” so it lowers your taxable income but not your AGI — which is exactly why New York had to write its own matching rule instead of getting the break automatically. Married filing separately? You’re excluded entirely. Starting with 2026, employers must separately identify your occupation and qualified tips on your information statements, so keep your own records too.
Albany Matches: the $25,000 State Exemption
New York’s version lives in the FY2027 budget (Chapter 59 of the Laws of 2026), signed May 28, 2026. Beginning with the 2026 tax year, filers may reduce their New York adjusted gross income by the same amount as the federal tips deduction — up to $25,000. Single filers earning up to $150,000 and joint filers up to $300,000 qualify, mirroring the federal thresholds. The state estimates the exemption costs about $50 million a year.
Because New York’s break is a subtraction from state AGI — not just a copy of the federal line — it flows into everything downstream of AGI: your state taxable income, your credits, and, crucially, your city tax. File as you always have; the subtraction is claimed on your 2026 state return, which you’ll file in early 2027.
One planning note: the federal deduction started in 2025, but New York’s starts in 2026. If you worked for tips in 2025, you get the federal break on that return — the state break begins with tips earned in 2026.
What About New York City’s Own Income Tax?
Good news for the five boroughs: you don’t need a separate city law. New York City’s resident income tax isn’t computed from scratch — it’s calculated on your New York State taxable income, using the city’s own 3.078%–3.876% rate table. When the state tips subtraction shrinks your NY AGI, your state taxable income shrinks with it, and your city tax falls automatically.
In our worked example below, that pass-through is worth $766 a year — nearly a fifth of the total savings. Yonkers residents get the same flow-through on their 16.75% surcharge, since it’s computed as a percentage of state tax. If you live outside the city and just work there, you were never paying NYC tax anyway — see our NYC taxes guide for how residency works.
How the Two Laws Stack on One Tip Dollar
Think of each $1,000 of qualified tips as passing through three toll booths that have all been lifted: your federal marginal rate (12% for our example server — $240 per $1,000), your NY State rate (about 5.4% on this income — $54), and your NYC rate (about 3.8% — $38). Stacked, that’s roughly 21 cents saved per tip dollar for a typical NYC server — before FICA, which still takes its 7.65%.
Higher earners stack less: once your income pushes into the 22% federal bracket the federal savings per tip dollar grow, but the $150,000/$300,000 phaseout starts clawing the deduction back. Run your own numbers in the custom salary breakdown tool — and note the tool doesn’t yet subtract tip income, so treat its output as the “before” picture.
$40,000 Wages + $20,000 Tips: Before vs. After
Meet our example server: single, lives in Queens, earns $40,000 in hourly wages and $20,000 in reported tips — $60,000 total, comfortably under every cap and phaseout. Here’s the 2026 tax bill with and without the new laws:
| Tax | Before | After | You save |
|---|---|---|---|
| Federal income tax | $5,020 | $2,620 | $2,400 |
| NY State income tax | $2,643 | $1,563 | $1,080 |
| NYC resident income tax | $1,891 | $1,125 | $766 |
| Social Security (6.2%) | $3,720 | $3,720 | $0 |
| Medicare (1.45%) | $870 | $870 | $0 |
| Total tax | $14,144 | $9,899 | $4,245 |
| Take-home pay | $45,856 | $50,101 | +$4,245 / yr |
The math behind the “after” column: the $20,000 federal deduction drops federal taxable income from $43,900 to $23,900 — the whole $20,000 comes off the 12% bracket, saving exactly $2,400. New York AGI drops from $60,000 to $40,000, cutting state tax by $1,080 and — through the state-taxable-income link — city tax by $766. FICA doesn’t budge: it’s calculated on the full $60,000 either way.
Net effect: $50,101 in your pocket instead of $45,856 — a 9.3% raise funded entirely by tax relief. That’s $354 a month: a MetroCard, a utility bill, and then some.
What “No Tax on Tips” Does NOT Do
Payroll taxes still apply. This is the big one: Social Security (6.2%) and Medicare (1.45%) are calculated on your tips exactly as before — $4,590 on our example server’s $60,000, untouched by either law. Your employer still withholds and reports them.
Unreported tips don’t qualify. Cash tips you never report were never going to get a deduction — and claiming one would require admitting the income. The deduction only covers tips on your W-2 or 1099.
Not everything called a “tip” counts. Mandatory service charges, automatic gratuities, and negotiated amounts are excluded. So are tips earned in professional service businesses — if you’re a lawyer or consultant who happens to get a “tip,” the IRS says no.
Two cliffs to calendar. The federal deduction ends after tax year 2028 unless Congress extends it; New York’s exemption has no sunset in the enacted law but lives and dies with future budgets. And if you file married-separately, the federal deduction is off the table entirely.
Finally, don’t expect your 2026 paychecks to feel different week to week: withholding tables weren’t redesigned around the deduction, so most of the savings lands as a bigger refund — or a smaller balance due — when you file. For the broader picture of what New York takes from a paycheck, our New York tax guide and hourly vs. salary guide have you covered.
No Tax on Tips FAQs
Who qualifies for no tax on tips in New York?
Workers in occupations that customarily and regularly received tips on or before December 31, 2024 — servers, bartenders, barbers, delivery drivers, hotel staff, and similar tipped jobs. Your tips must be voluntary, non-negotiated, and reported on your W-2 or 1099. Single filers earning up to $150,000 (joint up to $300,000) qualify for the full benefit.
How do I claim the tips deduction?
On your federal return, claim it on the new Schedule 1-A — you don’t need to itemize. On your New York return, subtract the same amount (up to $25,000) from your state AGI, starting with tax year 2026. Keep your own tip records; from 2026 your employer must separately report qualified tips — look for Code TP in W-2 Box 12 (TT is the overtime code).
Do I need to itemize to get the federal tips deduction?
No. It’s available whether you take the standard deduction or itemize. But note it’s a “below-the-line” deduction: it lowers your federal taxable income, not your AGI.
Does New York City conform to the state tips exemption?
Effectively, yes. NYC’s income tax is computed on your New York State taxable income, so the state AGI subtraction flows straight through and lowers your city tax too — no separate city action needed. In our example that pass-through saves $766 a year.
What if my tips are more than $25,000?
Only the first $25,000 is deductible/exempt per tax return — the rest is taxed normally. A married couple filing jointly shares one $25,000 cap even if both spouses earn tips.
Are self-employed tipped workers eligible?
Yes. Both employees and self-employed individuals in qualifying tipped occupations can claim the federal deduction, as long as the tips are reported. The same reporting and occupation rules apply.
Does no tax on tips reduce my Social Security or Medicare?
No — FICA still applies in full. The deduction and exemption cover income tax only. Tips remain wages for Social Security and Medicare, so your future benefits are unaffected (and your current payroll tax is undiminished).
Is the federal tips deduction permanent?
No. It applies to tax years 2025 through 2028 only — no deduction for years beginning after December 31, 2028, unless Congress extends it. New York’s exemption, enacted for 2026 onward, has no sunset in the current law. Figures verified October 2026; see our methodology page. Reviewed by Daniel Mitchell.
What is the tipped minimum wage in New York for 2026?
New York’s general minimum wage is $17.00/hr in NYC, Long Island, and Westchester ($16.00 elsewhere). Hospitality employers may apply a tip credit: tipped service employees must receive at least $14.15/hr cash wage ($2.85 tip credit) downstate or $13.30/hr ($2.70 credit) upstate; tipped food-service workers at least $11.35/hr ($5.65 credit) downstate or $10.70/hr ($5.30 credit) upstate.
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Federal: One Big Beautiful Bill Act (P.L. 119-21), new IRC §224 — up to $25,000 deduction, tax years 2025–2028, phaseout above $150K single / $300K joint; IRS proposed regulations Sept 19, 2025. New York: FY2027 budget, Chapter 59 of the Laws of 2026 (S.9009, signed May 28, 2026) — NY AGI subtraction up to $25,000 from tax year 2026. Worked example computed with the 2026 engine: IRS Rev. Proc. 2025-32, 2026 NY State & NYC tables — see methodology. Reviewed by Daniel Mitchell, U.S. Tax Consultant.