Tax on Tips by State: Where Tipped Workers Pay the Most

Are Tips Taxable Income? (Yes, and That Didn’t Change)

You have probably heard it from a coworker or a headline: “tips aren’t taxed anymore.” Then your paycheck arrives and money is still coming out. So which is it?

Tips are taxable income. They always have been, and they still are. At the federal level, tips count toward your income tax and your FICA payroll taxes (Social Security and Medicare). At the state level, tips are taxed wherever a state has an income tax.

The 2025 “No Tax on Tips” provision did not erase any of that. It created a federal income tax deduction, not an exemption. A deduction lowers the income you are taxed on. It does not stop the IRS from counting your tips, and it does not stop your employer from withholding.

The reporting rules also stayed the same. If you earn $20 or more in tips in a month from one employer, you still report them. Self-employed workers still report tips as business income. None of that paused.

So the honest version of “no tax on tips” is narrower: a federal income tax break, capped, temporary, and claimed when you file. Whether your tips get hit with state tax is a separate question, and the answer depends entirely on where you work.

How the Federal “No Tax on Tips” Deduction Works (2025-2028)

The deduction comes from the One Big Beautiful Bill Act. Here is the shape of it.

You can deduct up to $25,000 in qualified tips per year from your federal taxable income. It runs for tax years 2025 through 2028, then expires unless Congress renews it.

It is available whether you itemize or take the standard deduction, so most tipped workers can use it. The deduction phases out once your modified adjusted gross income passes $150,000 (single) or $300,000 (married filing jointly), dropping at a rate of $100 for every $1,000 above the threshold.

The tips have to be “qualified.” That generally means voluntary tips, in an occupation that customarily and regularly receives tips, properly reported. Employees see the figure on a W-2; self-employed workers report it from their own records.

One number to keep in perspective: the average worker benefit from this deduction is estimated at about $1,400 in 2026, and the savings skew toward higher earners. It helps, but it is not life-changing for most servers and bartenders.

What it does not touch matters just as much. FICA still applies to every tipped dollar. Withholding still happens. And, again, it is a federal break. Your state may or may not follow along.

The Three Buckets: How States Treat Tip Income

Most articles explain the federal deduction or list state tax rates, but rarely connect the two. Here is the framework that actually answers your question. Every state falls into one of three buckets.

Bucket 1: No state income tax. Nine states do not tax wage income at all, so your tips are never taxed at the state level no matter what the federal law says.

Bucket 2: States that conform to the federal tip deduction. A small group of income-tax states mirror the federal break. If you live in one, you can deduct qualified tips on your state return too.

Bucket 3: States that tax tips fully, with no deduction. This is the largest group, roughly 35 income-tax states. They have an income tax and have not adopted the tip deduction, so your tips are taxed by the state in full. The federal break gives you no state relief at all.

The reason this matters: two servers earning identical tips can end up with very different take-home pay based purely on which bucket their state sits in. Knowing your bucket is the first step to estimating what you actually keep, which is the whole point of a tool like Server44.

State conformity is also moving fast. Some states adopted the deduction for 2026 but not 2025. Always confirm your state’s current-year status before you file.

States Where Your Tips Get Taxed the Most

If you want a short answer to “where do tips get taxed the most,” it is the high-rate states that also sit in Bucket 3.

The states with the highest top marginal income tax rates for 2025-2026 are:

California: 13.3% top rate (12.3% plus a 1% mental-health surcharge on income over $1 million)
Hawaii: 11% top rate
New York: 10.9% top rate

Most tipped workers will not hit those top brackets, since the highest rates apply to very high incomes. But the broader point holds: these states tax wage and tip income at steep graduated rates, and they have largely declined to conform to the federal tip deduction.

That is the double hit. A high-rate, non-conforming state taxes your tips at a stiff rate and gives you no state-level deduction to soften it. A bartender in California and a bartender in Idaho can earn the same tips and report the same federal return, yet the Californian keeps less.

Other income-tax states with no conformity, even at more moderate rates, land in the same bucket. The deduction shrinks your federal bill and does nothing for the state line.

There is one more wrinkle. Illinois, Maine, and the District of Columbia have specifically chosen not to conform to the tip deduction, citing the revenue they would lose. So in those places the non-conformity is a deliberate decision, not an oversight, and it is unlikely to change quickly.

States Where Tipped Workers Keep the Most

Some states are genuinely friendly to tipped income.

The nine no-income-tax states are the clear winners. Your tips face zero state income tax in:

Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington (note: Washington taxes capital gains, not wages)
Wyoming

If you tend bar in Las Vegas or wait tables in Miami, the only income tax on your tips is federal. That is a meaningful edge over a server doing the same job in a high-rate state.

The conforming states are the second tier. As of early 2026, Idaho, Iowa, Montana, North Dakota, and Oregon fully conform to the federal tip deduction, so you can deduct qualified tips on your state return as well as your federal one. Colorado partially conforms (tips and auto-loan interest, but decoupled from the overtime deduction).

A few more states are coming online. Indiana, Georgia, and Michigan passed legislation making the deductions available starting in the 2026 tax year, not on 2025 returns. If you live in one of those, the timing matters: claim federally now, but check whether your state break applies to the year you are filing.

Conformity is also costly for states. Eight states with tax codes tied to the tipped-income deduction are projected to lose roughly $336 million in 2026 revenue. That price tag is exactly why most states have stayed in Bucket 3, and why a state that conforms today could revisit it later.

What This Means for Your Paycheck, and How to Track It

Here is the practical takeaway for a tipped worker trying to plan.

Your paycheck does not change much. Employers still withhold income and payroll tax on reported tips throughout the year. The deduction is not applied at the register or on payday. You realize it only when you file your return, as a smaller federal tax bill or a larger refund.

Report everything. The deduction depends on tips being properly reported. Underreporting cash tips to dodge withholding now also forfeits the deduction on those same dollars, plus exposes you to a 50% FICA penalty if the IRS finds them.

Self-employed and gig workers, plan quarterly. Delivery drivers and other 1099 tipped workers do not have an employer withholding for them. You generally still qualify for the federal deduction if your occupation customarily receives tips, but you should make quarterly estimated payments that account for both federal and state tax. Your state treatment follows your state of residence and its bucket.

Know your real number. Because the federal deduction, your federal bracket, and your state’s bucket all interact, the only way to know your true take-home is to run the math for your specific situation. A tip tracker that logs cash versus card tips and calculates net income by state, like Server44, turns a confusing tax question into a number you can actually plan around. You can compare it against other approaches on our compare page or browse our free calculator tools for quick estimates.

For deeper reading on the federal side of the rules, see the rest of our blog, and when you are ready to track tips properly, you can download the app.

One disclaimer worth repeating: this article is general information, not tax or legal advice. State conformity is changing year to year. Verify your current-year status with your state’s tax authority or a tax professional before you file.

Frequently Asked Questions

Do I still pay state income tax on my tips in 2026?

Yes, in most income-tax states. The federal No Tax on Tips deduction does not automatically apply to state taxes. Only a handful of states conform, so tipped workers in roughly 35 income-tax states still owe full state tax on their tips.

Which states don’t tax tips at all?

The nine states with no personal income tax on wages: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Tips are never subject to state income tax in these states.

Which states let me deduct tips on my state return?

As of early 2026, Idaho, Iowa, Montana, North Dakota, and Oregon fully conform to the federal tip deduction, and Colorado partially conforms. Indiana, Georgia, and Michigan added the deduction starting in tax year 2026.

Which states tax tips the most?

High-rate states that have not conformed to the federal deduction. California has a top rate of 13.3%, Hawaii 11%, and New York 10.9%. These states combine high marginal rates with no state tip deduction.

Are tips still taxable now that there’s no tax on tips?

Yes. Tips remain taxable income. The law created a federal income tax deduction of up to $25,000 for tax years 2025 through 2028, but FICA and payroll taxes and tip reporting requirements are unchanged.

Will tips still be withheld from my paycheck?

Yes. Employers still withhold income and payroll taxes on reported tips. The deduction is claimed when you file your return, not at the time you are paid.

Does the federal tip deduction have an income limit?

Yes. It phases out for taxpayers with modified adjusted gross income above $150,000 for single filers or $300,000 for married couples filing jointly.