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Legislation has been proposed in New York that would exempt a portion of tipped income from New York State income tax. The proposed legislation would allow eligible employees to deduct up to $25,000 in tips from their New York taxable income. If enacted, the legislation would apply to taxable years beginning on or after January 1, 2026.
What the Proposal Does and What It Does Not Do
At its core, the legislation would allow employees to deduct up to $25,000 of cash and credit-card tips they receive from their state taxable income. The legislation is intended to parallel recent federal changes enacted under the One Big Beautiful Bill Act (“OBBBA”), which created federal deductions for “qualified tips” and certain overtime compensation.
Unlike the OBBBA, the proposed New York legislation does not include income thresholds, occupational limitations, or other eligibility constraints that exist under federal law.
Why This Matters for Employers
Employers should be prepared for increased scrutiny of their paystubs due to employee misunderstanding and increased scrutiny. “No tax on tips” is a politically appealing slogan, but it does not mean tips are no longer reportable, taxable for payroll purposes, or exempt from wage-and-hour rules. Employers should expect questions from employees about how tipped income is tracked and reported.
Employers should ensure that their payroll systems can reliably capture and distinguish tipped income and overtime compensation, particularly as revised W-2 reporting requirements take effect. Inaccurate reporting may not only undermine employees’ ability to claim deductions but also expose employers to audits or enforcement actions.
Looking Ahead
Hospitality and service-sector employers should begin evaluating payroll systems, tip-reporting practices, and overtime tracking. They should also ensure that their paystubs comply with applicable law.
We will continue to monitor the progress of the New York legislation and provide updates.
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