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As part of the recently enacted New York State budget, New York lawmakers approved a “No Tax on Tips” initiative that will exempt up to $25,000 in qualifying tipped income from New York State income tax beginning in 2026. The measure is intended to provide tax relief for workers in hospitality and other tipped industries and mirrors the recent federal efforts to eliminate tax on tips detailed in our prior alert that can be found here.
Eligible tipped employees will be permitted to deduct qualifying tips from taxable income under the new law. As a reminder, the tax exemption only applies to voluntary tips. Income received by employees from automatic gratuities and administrative fees do not qualify for the tax exemption. For employers, this means that you must carefully distinguish between voluntary tips and mandatory charges, particularly in industries such as hospitality, food service, and gig-based platforms. Employers should ensure that their payment systems allow customers to adjust or decline tips, review tip pooling arrangements for compliance, and confirm that tip income is accurately reported on employee tax forms
We will continue to monitor developments and forthcoming guidance from the state and will provide updates as implementation guidance becomes available.
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