No Tax on Tips in NJ: What Restaurant and Hospitality Workers Need to Know (2026)

The No-Tax-on-Tips Deduction: What It Actually Is

The phrase “no tax on tips” is shorthand for a new above-the-line federal deduction created by IRC Section 224 under the One Big Beautiful Bill Act. It does not exempt tip income from tax — tips remain taxable income. Instead, it allows qualifying workers to deduct up to $25,000 in tip income from their federal adjusted gross income, reducing the income subject to federal tax.

The distinction matters. A deduction reduces taxable income by the deduction amount. If you have $22,000 in tips and you’re in the 22% federal bracket, the deduction saves $4,840 in federal income tax. It is not a dollar-for-dollar credit, and it does not apply to Social Security and Medicare taxes (FICA).

How IRC §224 Works: The Mechanics

Who qualifies: Employees who receive tips in covered industries — primarily food and beverage service, hospitality (hotels, resorts), beauty and personal care services, and similar tip-based occupations. The IRS is expected to publish a specific list of qualifying job categories.

Maximum deduction: $25,000 per year. If you received $30,000 in tips, you deduct $25,000; the remaining $5,000 is still taxable.

Tax years: 2025, 2026, 2027, and 2028 only. The deduction is scheduled to sunset on December 31, 2028 unless Congress extends it.

Phase-out: The deduction is reduced once your AGI (before the tip deduction) exceeds:

• $150,000 for single filers
• $300,000 for married filing jointly

The phase-out rate is 25% of the excess AGI above the threshold. At $250,000 AGI (single), the deduction is fully eliminated. Most tip workers earning primarily from service income will be well below these thresholds.

Employer requirements: Tips must be reported to your employer and included in the employer’s tip reporting system. Under-reported or unreported cash tips that were not run through employer payroll do not qualify. This creates a strong incentive to ensure your employer is correctly reporting your tips on your W-2 — the same tips that appear in Box 8 (allocated tips) or on Form 4137 cannot simply be claimed as qualifying.

FICA is still owed: The tip deduction only reduces federal income tax. Social Security and Medicare taxes (7.65% combined employee share) are still calculated on tip income. Your employer is required to withhold FICA on reported tips. For 2026, the Social Security wage base is $184,500 — tips count toward that base.

Dollar Examples for NJ Workers

Example 1: NJ Restaurant Server (Single Filer)

Without the tip deduction, federal taxable income would have been $48,900 and federal tax approximately ~$6,485 — a savings of $3,441 from the §224 deduction at the 22% marginal rate.

NJ result: NJ taxes the full $65,000 in income. NJ has no tip deduction. At NJ’s graduated rates (1.4% to 5.525% for this income level), approximate NJ GIT is ~$2,800. The federal savings do not carry over.

Example 2: Self-Employed NJ Barber ($60K Gross, $15K in Tips)

For self-employed workers, the picture is more complicated. A self-employed barber does not have an employer reporting tips through payroll — all income comes through Schedule C. The IRS has indicated that §224 is intended primarily for employees whose tips are reported through employer payroll systems. Self-employed workers who receive tips as part of their service fees generally do not qualify for the tip deduction.

However, if the barber works as a booth renter (common in NJ salons) and receives separate cash tips from clients — and those tips are tracked and reported on their Schedule C — the qualifying treatment is still being clarified by IRS guidance. Until the IRS publishes a revenue ruling or FAQ specifically addressing self-employed tip workers, the conservative position is to report all income as Schedule C income and wait for guidance.

The NJ Conformity Problem

New Jersey has not enacted legislation to adopt IRC Section 224. As of March 2026, all tip income earned in New Jersey is fully taxable under the NJ Gross Income Tax regardless of the federal treatment.

This means NJ tipped workers face an unusual situation on their 2025 and 2026 returns:

• Federal return (Form 1040): Claim the §224 deduction. Report tips as income, then take the above-the-line deduction on Schedule 1, reducing AGI.
• NJ return (NJ-1040): Report the same tip income in full. No corresponding deduction. Pay NJ GIT on all tips.

The result is a federal/NJ income difference that must be tracked carefully. Your NJ-1040 will show higher taxable income than your federal 1040, which is the correct result — not an error.

Practical impact on NJ estimated taxes: If you make quarterly NJ estimated payments (NJ-1040-ES), do not reduce your NJ estimates based on the federal tip deduction. Your NJ liability is based on NJ taxable income, which includes tips in full.

Employer Obligations Under the Tip Deduction

Employers in the food, beverage, and hospitality industries have new compliance considerations under §224:

• W-2 reporting: The IRS is expected to issue guidance on how qualifying tip amounts should be identified on employee W-2s to support the deduction. Until guidance issues, ensure your payroll system correctly captures and reports all tip income in Box 8 (Allocated Tips) or Box 1 (Wages, tips, other compensation).
• FICA withholding: FICA must still be withheld on tips as before. The §224 deduction does not change FICA obligations.
• Tip credit and credit card tips: Employers who receive credit card tips and distribute them to employees should continue standard procedures. Those tips are still subject to FICA and still qualify for the employee’s §224 deduction (assuming the employee qualifies).
• NJ SDI/FLI: NJ state disability and family leave insurance premiums are calculated on NJ wages, which include tip income. The federal deduction does not reduce the base for NJ SDI/FLI calculations.

Industries Covered — and Industries That May Not Qualify

The IRS is expected to publish an official list. Based on the statutory text, covered industries likely include:

• Food and beverage service (servers, bartenders, bussers, delivery workers)
• Hotel and hospitality (bellhops, valets, concierge, housekeeping)
• Hair, nail, and beauty services (barbers, cosmetologists, estheticians, nail technicians)
• Personal care and body work (massage therapists, spa workers)
• Casino dealers (tips are already subject to specific IRS reporting rules)

Likely NOT covered:

• Rideshare drivers (tips received through apps from customers; not traditional employer tip reporting)
• Personal trainers receiving tips from clients directly
• Tattoo artists receiving cash tips (unless working as employees in a covered establishment)
• Delivery app workers classified as independent contractors

The boundary between covered and non-covered workers will be clarified in IRS guidance. When in doubt, document the tips and consult a CPA.

How to Claim the Deduction on Your 2025 Federal Return

The tip deduction is an above-the-line deduction — you claim it on Schedule 1 of Form 1040, Line 24 (or a new line designated for §224). This means you do not need to itemize to benefit. Even filers who take the standard deduction get the tip deduction in addition.

Steps:

1. Gather all W-2s showing tip income (Box 8, or verify with your pay stubs)
2. Total your qualifying tip income (up to $25,000 cap)
3. Verify your AGI is below the phase-out threshold ($150,000 single / $300,000 MFJ)
4. Enter the deductible amount on the applicable Schedule 1 line
5. On your NJ-1040, include all tip income in your NJ gross income (no deduction)

Most major tax software (TurboTax, H&R Block, FreeTaxUSA) is expected to add a §224 worksheet for the 2025 filing season. However, verify that the NJ-1040 is correctly adding back the federal deduction so you are not under-reporting NJ income.

Frequently Asked Questions