Governor Kathy Hochul announced a proposal January 8 to eliminate New York State income taxes on up to $25,000 of tipped income starting in 2026, introducing Senate Bill S587-A that now sits before the Senate Committee on Budget and Revenue. The measure would deliver tax relief to hospitality workers, delivery drivers, and service employees across the state while creating new compliance requirements for employers.
The bill would amend Section 612 of the New York Tax Law to allow taxpayers to deduct cash and credit card tips that qualify as wages under federal tax code. If enacted, the deduction would apply to taxable years beginning January 1, 2026.
Federal Framework Sets the Stage
New York’s proposal mirrors provisions in the federal One Big Beautiful Bill Act, which established above-the-line deductions for qualified tips and overtime compensation at the federal level. The OBBBA allows workers to deduct up to $25,000 in qualified tips from their federal taxable income, with phase-outs starting at $150,000 in modified adjusted gross income for single filers and $300,000 for joint filers.
Under the federal law, the deduction reduces by $100 for every $1,000 earned above those thresholds. A worker earning $160,000 who received $18,000 in tips would see their federal deduction reduced by $1,000, dropping their tax savings from $4,320 to $4,080 at a 24 percent tax rate.
The federal legislation requires employers to report qualified tips and overtime separately on revised W-2 forms using Treasury-designated occupation codes. Employers must also update withholding tables and W-4 forms, though the changes don’t alter existing obligations to withhold FICA taxes or comply with minimum wage rules.
Key Differences in State Approach
New York’s bill differs from the federal framework in notable ways. Senate Bill S587-A doesn’t explicitly incorporate the income-based phase-outs included in federal law, leaving uncertainty about whether high earners would qualify for the full state deduction. The legislation also doesn’t specify which occupations qualify as customarily tipped, potentially broadening eligibility beyond the federal definition.
The federal law covers voluntary cash and credit card tips received directly from customers or through tip-sharing arrangements in occupations that customarily receive gratuities. New York’s language simply references tips “considered wages or compensation” under the Internal Revenue Code without additional restrictions.
This creates potential misalignment between state and federal eligibility that employers and workers will need to navigate when filing 2026 tax returns.
Part of Broader Relief Package
The tipped income proposal fits within Hochul’s Affordability Agenda, which has delivered $9 billion in tax relief since she took office. The governor’s 2026 budget includes a middle-class tax cut saving $1 billion for 8.3 million New Yorkers earning up to $323,000 jointly, benefiting 77 percent of state filers.
“As we welcome in the New Year, affordability remains my top priority,” Hochul said in announcing the proposal. “I’m kicking the new year off with a proposal of no state income tax on tips, continuing my efforts to make New York more affordable for hard working New Yorkers.”
The package also includes the state’s largest-ever child tax credit expansion, phasing in between 2026 and 2027 to exceed the previous $330 per child maximum. A statewide minimum wage increase took effect January 1, 2026, addressing rising costs in groceries, insurance, and utilities.
Tax Savings Breakdown
For a New York service worker earning $25,000 in tips, the state deduction could save between $1,500 and $2,000 depending on their effective state tax rate, which ranges from 4 to 10.9 percent across income brackets. Combined with the federal deduction, a worker in the 22 percent federal bracket could save approximately $5,500 on that same $25,000 in tips before any phase-outs apply.
The standard deduction rose to $15,750 for single filers and $31,500 for joint filers in 2025, providing context for workers calculating their 2026 tax liability. Workers must still report all tips for FICA withholding and federal income tax purposes, claiming the deduction when filing their individual returns.
Employer Compliance Requirements
The proposal creates no relief from existing employer obligations. Businesses must continue withholding FICA taxes on all tips, maintain accurate payroll records, and comply with Fair Labor Standards Act tip credit requirements and state minimum wage laws.
“Employers must ensure payroll systems accurately capture and report qualified tips and overtime,” according to analysis from employment law firm Littler Mendelson. “Clear employee communications are critical, as they may assume ‘no tax on tips’ means tips are no longer reportable.”
Employers face heightened scrutiny as workers seek to maximize deductions. Payroll systems need upgrades to separately track and report tips and overtime on revised W-2 forms by the 2026 filing deadline. Failure to accurately report could trigger audits or penalties.
The federal reporting requirements add complexity. Businesses must provide Treasury tipped occupation codes on W-2 and 1099 forms, update withholding tables, and ensure systems distinguish between regular wages, qualified tips, and overtime compensation.
What Workers Should Know
Tipped employees should track all cash and credit card tips meticulously throughout 2026, as the deduction depends on accurate reporting. Workers earning above $150,000 individually or $300,000 jointly need to calculate phase-outs for the federal deduction, which may not apply at the state level depending on final legislation.
The deduction doesn’t eliminate reporting requirements. All tips remain subject to FICA withholding for Social Security and Medicare, and employers must continue withholding federal income tax based on W-4 elections. Workers claim the deduction when filing their personal tax returns, not through payroll.
Tax professionals recommend consulting with advisors to understand how the deduction interacts with other tax benefits and to verify eligibility under both state and federal rules.
Legislative Path Forward
Senate Bill S587-A awaits action in the Senate Committee on Budget and Revenue as of January 27, 2026. The governor emphasized fiscal responsibility in rolling out the proposal, aiming to deliver relief without triggering tax increases elsewhere in the budget.
Employers should monitor the legislation for regulatory guidance clarifying eligibility criteria, income limits, and coordination with federal rules. The state Department of Taxation and Finance will likely issue additional instructions before the 2026 filing season.
Business groups recommend auditing payroll systems now, issuing clear employee communications explaining that deductions don’t eliminate reporting obligations, and consulting with employment and tax counsel to ensure compliance when the law takes effect.
The proposal represents a significant policy shift for New York’s service economy, where tipped workers span restaurants, bars, salons, delivery services, and hospitality venues across the state. Final implementation details will determine whether the state deduction fully aligns with federal rules or creates additional complexity for the estimated hundreds of thousands of workers who could benefit.
Source
New York Governor Proposes “No Tax on Tips” Legislation | Littler