Will Your State End Tax on Tips This Year?

You may have heard about eliminating federal taxes on tips. Often earned by service workers, tips are taxable and reported as wages on an individual’s tax return. There is much debate about whether taxes on tips should stay or go. Some speculate that a potential tax exemption could help low-income workers, while others say it may lead to systemic abuse.

But how is your state weighing in on the tax on tips debate?

States can follow the federal “no taxes on tips” movement or decide to continue taxing tip income. They could also choose to instate wage caps on tips, which would mean that only a certain amount of tip income would be excluded from taxes.

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Here are the states that have proposed bills relating to no taxes on tips and where those proposals are now.

Note: States with no income taxes were excluded from this list as they do not tax tips.

Arizona tax on tips

Arizona has proposed HB 2081, which, if passed, would effectively eliminate state taxes on tips. Proposed by Rep. Gail Griffin (R-Hereford), the bill has:

• An estimated cost of $31 million per year.
• No cap on how much someone can claim in tips.

The proposal needs a final vote before clearing the Arizona House and going to the state Senate.

Notably, Arizona is a “piggyback” state for tax purposes, meaning residents use their federal adjusted gross income (AGI) as a starting point for state income taxes. So, if “no tax on tips” passes federally, a state bill could become obsolete.

California no tax on tips?

California Assembly Member Leticia Castillo (R-Home Gardens) proposed no tax on tips with AB 1443. If approved, the measure would make tips tax-exempt for service industry workers like barbers and waiters.

But this isn’t California’s first rodeo with no tax on tips. Last year, Senate Republicans in the Golden State proposed a no-taxes-on-tip income bill for hospitality and service industry workers. However, the bill wasn't considered by the legislature.

Are tips taxable in Connecticut?

Connecticut is preparing for a federal no tax on tips law by ensuring income caps are instated. HB 5972, proposed by Rep. Kate Farrar (D-West Hartford/Newington), would do the following:

• Require high-income earners with tip income to pay state taxes.
• Cap those earning $100,000 or more in tips to pay the state the amount forgiven by the federal government.

The bill could go into effect on January 1, 2025, meaning that if federal law exempts tip income this year, higher-income Connecticut taxpayers could still be taxed on tips at the state level if this bill is signed into law.

Georgia ending tax on tips?

Georgia is not only looking to exempt cash tips from state taxes but also other forms of tip income. Under SB 2, proposed by Senate Republicans:

• Cash and electronic tips would be excluded from state income taxes.
• Non-cash tips, like tickets, would also be excluded from state income tax.
• Service charges (like automatic gratuities) would still be taxed.

If signed into law, the bill could go into effect on January 1, 2025, and taxpayers could save an estimated $110 million per year. The bill is going to the Senate floor, but no hearing date has been determined.

Hawaii tax on tips

Hawaii introduced House and Senate bills this year effectively excluding state income taxes from tipped employees. Senate Democrat sponsors drafted SB 1153 to emulate the “no tax on tips” federal movement, writing, “The legislature believes that a similar exclusion at the state level would help local small businesses attract qualified employees.”

If signed into law, the proposal(s) could begin on January 1, 2026.

Tip tax law in Illinois

Illinois has a bill proposing no tax on tips. HB 1750, sponsored by Rep. Joe C. Sosnowski (R-Rockford), would not only:

• Exclude tips from wages, but also
• Exempt overtime from state income taxation.

The bill would also be “effective immediately” if signed into law.

Another Illinois bill seeks to end the state's tip credit — an amount paid by customers to subsidize employee pay. If the tip credit is eliminated, some speculate independent and family-owned restaurants across the state would feel the strain from rising payroll costs.

How tips are taxed in Iowa

Iowa House Democrats are not only considering no tax on tips but also seeking no state taxes on overtime. Together, the two bills would:

• Exempt cash tips from state income tax.
• Exempt overtime pay that is compensated at 1.5 times the regular rate but not exceeding twice the rate.

If signed into law, both bills could go into effect as early as January 1, 2026. Iowa House Republicans have also proposed exempting overtime pay from state taxes, but that bill hasn’t moved since passing out of subcommittee two months ago.

Could Kansas eliminate taxes on tips?

Kansas is considering a no tax on tips bill with an income cap. SB 277, sponsored by the Committee on Assessment and Taxation, includes:

• A 2026 tax year start date, meaning tips would still be taxable in 2025 if the bill is signed into law.
• A $25,000 annual exemption. Tips reported higher than this amount would be taxed.

The bill would save taxpayers $13.2 million in just the fiscal year 2027 alone.

Kentucky proposes no tax on tips

Kentucky recently lowered its income tax rate and now has a bill to exempt tax on tips. HB 26, sponsored mainly by House Republicans, excludes taxes on tips and has other key tax features:

• No tax on overtime compensation.
• No taxes on tips from cash, electronic payments, money received through tip pools, and tip-sharing agreements.

If signed into law, the proposal could start on January 1, 2026, and continue through January 1, 2030. However, the Kentucky bill has only been recently introduced.

Maryland tax on tips proposal

Maryland is considering other tax provisions in addition to exempting tip income from state taxes. The No Tax on Tips Act would include the following:

• Exempt tips from state income taxes for food service and hospitality workers.
• Phase in a higher minimum wage, potentially up to $20 per hour, by 2027.
• Prohibit employers from using a “tip credit” as part of employees’ wages (a practice that lowers base pay by relying on tips an employee receives).

The proposal is sponsored by Sen. Cory V. McCray (D-Baltimore City) and has passed the first reading in the state Senate.

Tips are taxed in Missouri

Missouri Senate Rep. John Simmons (R-Washington) seeks to end the state tax on tips and overtime pay. If enacted, the bill would be effective starting January 1, 2026.

However, since the bill includes the "no tax on overtime" provision, it might not succeed. In recent years, two prior bills sought to end taxes on overtime; both failed due to concerns about fiscal impact.

Nebraska no tax on tips or overtime?

Nebraska has proposed bills to exclude tips and overtime from state income taxes. LB 28 and LB 30, sponsored by Sen. Danielle Conrad (D-Lincoln), would do the following:

• Subtract tip payments when calculating an individual’s income.
• Exempt overtime pay when calculating income for state taxes.

If signed into law, the bills would go into effect on or after January 1, 2025.

New Jersey no tax on tips

New Jersey service workers would pay no tax on tips if S-3741 is signed into law. Proposed by Sen. Vince Polistina (R-Egg Harbor Township), the bill would:

• Remove tips from the list of taxable income on New Jersey’s gross income tax.
• Begin on or after January 1 next following the date of enactment.

The minimum wage in New Jersey is $15.49 for most employees. However, that number can include tips and base pay, so if an employee earns higher tips, the base pay may be lowered to meet the minimum wage rate. S-3741 could help higher-tip-earning employees potentially make up for lower base pay.

Are tips taxable in New York?

New York is also considering a no tax on tip income proposal. State Senate Republicans introduced two bills eliminating state taxes on tips and overtime:

• SB 587 would eliminate state income taxes on cash tips.
• SB 3914 would eliminate state income taxes on overtime pay.

Both bills could provide tax relief in a state that is one of the most expensive to live in and has some of the highest sales taxes across all U.S. states.

Does North Carolina tax tips?

North Carolina has a bill that includes more than no taxes on tips. Republican-led HB 11 would provide:

• An exemption of state income taxes on tips.
• No tax on overtime pay.
• An exemption on the first $2,500 in bonuses from state income taxes.

Bonus pay might include hourly and salaried workers. The bill has been passed to the state’s House Finance Committee for review.

Oregon ending tax on tips?

Sen. Dick Anderson (R-Lincoln City) has submitted a plan for a “No Tax on Tips” bill in Oregon. The bill would provide tax relief for service industry workers, including waitstaff, bartenders, and other tipped employees, by exempting tips from the Beaver State’s income tax.

Tips are currently taxed as ordinary income, which for Oregon taxpayers is between 4.75% and 9.9%, depending on an individual’s income bracket. If no tax on tips is formally proposed and signed into law, that would mean taxpayers could save at least $4.75 per $100 in tip income.

South Carolina no tax on tips proposals

South Carolina has bills filed in both the House and the Senate supporting no taxes on tips. Both are Republican-led and could save taxpayers almost $13.7 million annually. However, that lost state revenue only accounts for food service workers, a small portion of all employees that receive taxable tips. But South Carolina is currently operating at a $1.8 billion surplus according to the 2025-2026 proposed budget.

West Virginia taxes on tips

West Virginia's "no tax on tips" bill seeks to exempt tipped pay from the state's personal income tax. Sponsored by House Republican delegates, the bill specifies that only cash tips would be exempt from state taxes. The bill is currently in House Finance for review.

Indiana, Montana, North Dakota, and Virginia reject no tax on tips

Several states have decided against eliminating taxes on tips.

• Indiana. Gov. Braun’s budget proposal included an exemption for taxes on tips, but the provision was cut in the state’s House.
• Montana. Contrary to the other states on this list, Montana recently began taxing tips. Before last year, taxpayers working in the food, beverage, or lodging sectors did not have to pay Montana state income tax on tips and gratuities.
• North Dakota. Rep. Daniel Johnston (R-Kathryn) floated HB 1324 to exempt tax on tips already reported as federal taxable income. However, the House voted it down, saying the bill would have “no effect” if similar federal legislation passes.
• Virginia. HB 1965, sponsored by Del. Anne Ferrell Tata (R-Virginia Beach), proposed eliminating Virginia taxes on tips and overtime, but the bill failed in the 2025 General Assembly session.

Additionally, there has been talk of a proposed “no tax on tips” bill in Massachusetts, but the legislation is still being drafted.

More states may weigh in on the “no tax on tips” debate. State legislatures will meet throughout the year, and tip income could be on the slate of bills proposed. More than just your federal tax bill could be on the line — so keep informed and stay tuned.

Read More

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