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

Updated for the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025) - Key change: New IRC §224 creates a federal below-the-line deduction for tip income up to $25,000 (2025-2028), claimed on the new Schedule 1-A and flowing to Form 1040 line 13b on the 2025 form (line 13a on the 2026 draft). NJ Division of Taxation issued official guidance on December 1, 2025 confirming NJ does NOT conform. Reflects the final §224 Treasury regulations (Treas. Reg. §1.224-1) and NJ Treasury OBBBA guidance.

In This Article

1. The No-Tax-on-Tips Deduction: What It Actually Is
2. How IRC §224 Works: The Mechanics
3. Dollar Examples for NJ Workers
4. The NJ Conformity Problem
5. Employer Obligations Under the Tip Deduction
6. Industries Covered - and Industries That May Not Qualify
7. How to Claim the Deduction on Your Federal Return
8. Frequently Asked Questions
9. How to Request an Intake Review

Disclaimer: This article is educational and does not constitute tax advice or create a CPA-client relationship. Tax laws change frequently. Consult a licensed CPA before filing.

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

The phrase 'no tax on tips' is shorthand for a new below-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 taxable income (not AGI) via the new Schedule 1-A, which flows to Form 1040 line 13b on the 2025 form (line 13a on the 2026 draft).

Two distinctions matter. First, the deduction is below-the-line: it reduces taxable income but does NOT reduce AGI. So claiming §224 does not change the AGI or MAGI used for the EITC, the CTC phase-out, IRA deductibility, student loan interest, or other income-based tests, although the lower income tax can change how much of a nonrefundable credit the return can use. Second, the federal tax difference depends on the bracket computation. A $22,000 tip deduction at the top of a single filer's 12% bracket produces a $2,640 single-rate illustration; if some of the tips fall in the 22% bracket the arithmetic difference can change. Multiplying the entire deduction by one marginal rate may not match the completed bracket computation. The deduction is also not a dollar-for-dollar credit, and it does not apply to Social Security and Medicare taxes (FICA). A separately accepted tax-preparation scope applies the return rules to client-supplied facts; no full deduction or dollar result is promised.

How IRC §224 Works: The Mechanics

Who qualifies: Employees AND self-employed workers (per the final §224 regulations) in occupations on the IRS-published list. The controlling list is at Treas. Reg. §1.224-1(h) ('List of Occupations that Receive Tips') and maintained online at IRS.gov/TippedOccupations (opens in a new tab). Covered categories include food and beverage service, hotel and hospitality, hair / nail / beauty services (barbers, cosmetologists, estheticians), personal care and body work (massage therapists, spa workers), casino dealers, valets, and similar tip-based occupations. Occupation and Schedule C status are not enough: the payment and information reporting must independently satisfy Section 224.

Maximum deduction: Before the MAGI phaseout, the cap is $25,000 per year. If the full $30,000 consists of qualified tips and all occupation, voluntariness, information-reporting, filing-status, and self-employed net-income rules are satisfied, the deduction is at most $25,000 before the phaseout; the allowable amount can be lower on the actual return.

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 MAGI (before the tip deduction) exceeds:

• $150,000 for single filers (fully phased out at $400,000 MAGI - $250K phase-out range at $100 reduction per $1,000 excess MAGI per IRC §224(b)(2)(A))
• $300,000 for married filing jointly (fully phased out at $550,000 MAGI)

For example, a married couple with $350,000 MAGI and an otherwise allowable $20,000 qualified-tip amount has a $5,000 phaseout reduction, leaving $15,000 before any other applicable limit. The $550,000 joint endpoint describes the full $25,000 starting deduction, not every taxpayer.

The phase-out reduces the maximum deduction by $100 for every $1,000 of MAGI above the threshold (10% rate per IRC §224(b)(2)(A)). With a $25,000 maximum deduction and a 10% reduction rate, the phase-out range is $250,000. The deduction is fully eliminated at $400,000 MAGI single (starting from $150,000) and $550,000 MAGI MFJ (starting from $300,000). Those $400,000 / $550,000 endpoints assume you are claiming the full $25,000 deduction; if you claim fewer tips, your deduction phases out sooner - for example, $10,000 of qualified tips is fully phased out by $250,000 MAGI (single). Apply the actual MAGI, filing status, and qualified-tip amount.

For the Section 224 phaseout, MAGI adds the specified foreign-income exclusions under IRC Sections 911, 931 and 933 back to AGI. Reduce the otherwise allowable deduction by $100 for each full $1,000 above the applicable threshold, dropping a partial $1,000 and stopping at zero.

Reporting paths differ by year: For 2025, employees use W-2 Box 7 together with employer statements and corroborating earnings records under the transition rules; 2025 nonemployees may reconstruct tips only when the cash tips were included in an applicable aggregate Form 1099 box and contemporaneous records identify the amount. For 2026 and later, W-2 Box 12 code TP and the occupation field, or the new separately reported qualified-cash-tip and TTOC fields on Forms 1099-NEC/MISC/K, ordinarily supply the statutory statement. Form 4137 remains an employee-tip path. Schedule C, a daily log, or an aggregate 1099 amount alone does not substitute for the required 2026 statement.

Required eligibility rules (final §224 regulations): Several mechanical rules apply that the statute imposes through Treas. Reg. §1.224-1:

• SSN required: The taxpayer must have a valid-for-work Social Security Number issued by the return due date, including extensions. ITINs do not qualify.
• MFJ required if married: Married taxpayers must file jointly. MFS filers are ineligible for §224.
• SSTB transition: Notice 2025-69 treats a listed tipped occupation as outside an SSTB until January 1 of the first calendar year after final Section 224 SSTB regulations are issued. The April 2026 final qualified-tips regulations reserved that subsection, so the relief remains operative as of September 23, 2026. This transition rule does not classify the trade for the separate Section 199A QBI deduction.

Notice 2025-62 concerns employer and payer penalty relief for the new tips/overtime reporting requirements, while Notice 2025-69 supplies the separate Section 224 SSTB transition treatment. For the distinct Section 199A QBI analysis under Treas. Reg. Section 1.199A-5, the TY2026 SSTB phaseout begins above $201,750 taxable income for single filers or $403,500 for joint filers. That taxable-income test is different from the tip deduction's MAGI phaseout.

• Voluntariness: Only voluntary tips qualify. Automatic gratuities, mandatory service charges, and added-on 'service fees' are excluded because they lack the discretionary element that defines a tip. An amount added to the bill still counts as voluntary if the customer is expressly given the option to change it or remove it entirely.
• Managers, pools, and owners: A manager or supervisor may count a qualifying tip received directly for services performed in a listed tipped occupation, but may not count an amount received through a voluntary or mandatory tip-sharing arrangement such as a tip pool. The ownership anti-abuse rule applies when the recipient has a direct ownership interest in the payor of at least 5% of corporate vote/value or partnership profits/capital, or more than 5% of the beneficial interests in any other type of entity, tested when the tip is received; an amount within the rule is irrebuttably recharacterized.
• Excluded forms and activities: Digital assets, in-kind property, subscriptions, paywalls, and amounts received for pornographic activity are not qualified tips even when labeled tips, gifts, or donations. The receipts remain taxable income.

FICA is still owed: The tip deduction only reduces federal income tax. Social Security and Medicare taxes (7.65% combined employee share) still apply to cash tips (including card tips) of $20 or more a month from one employer; noncash tips and smaller monthly cash tips are not FICA wages. Your employer withholds FICA on reported tips from your wages or funds you provide, and any amount it cannot collect is reported to you to pay with your return. For 2026, the Social Security wage base is $184,500 - tips count toward that base.

As isolated arithmetic, $20,000 times an assumed 22% federal rate is $4,400, while $20,000 times a 7.65% employee FICA rate is $1,530, with a separate employer share under ordinary rules. Likewise, $15,000 times 22% is $3,300. These examples assume the stated rates apply and do not establish deduction eligibility, net savings or the complete tax result.

Dollar Examples for NJ Workers

Example 1: NJ Restaurant Server (Single Filer, 2026)

Notice the placement of the §224 deduction. It applies AFTER AGI and the standard deduction, not before. This matters because AGI stays at $65,000 for purposes of every other tax provision that uses AGI or MAGI (EITC, CTC, IRA deductibility, Marketplace subsidies, etc.).

Computing tax on $26,900 of 2026 taxable income for a single filer per Rev. Proc. 2025-32 (Table 3, unmarried individuals): 10% on the first $12,400 = $1,240, plus 12% on the next $14,500 (from $12,401 up to $26,900) = $1,740. Total ≈ $2,980. Without §224, taxable income would have been $48,900 and the 2026 single tax would have been ≈ $5,620 ($1,240 + 12% × $36,500 = $4,380; the 22% bracket does not begin until $50,400 of taxable income for single filers under Rev. Proc. 2025-32). Federal savings from §224 ≈ $2,640. Multiplying the $22,000 deduction by a 22% marginal rate would overstate the benefit; on these facts all of the tip income sits inside the 10%/12% brackets.

NJ result: NJ taxes the full $65,000 in income. NJ does not conform to §224. At NJ's graduated rates (1.4% to 5.525% for this income level), approximate NJ GIT is ~$2,100 (before the $1,000 personal exemption). The federal §224 savings do not carry over to NJ.

Example 2: Self-Employed NJ Barber ($60K Gross, $15K in Tips, 2026)

The final §224 regulations (Treas. Reg. §1.224-1) allow self-employed workers in listed occupations to claim the deduction when every requirement is met. Barbers and cosmetologists are on the list. In this 2026 example, the $15,000 qualified-cash-tip amount and TTOC must be separately reported in the new tip fields on an applicable Form 1099-NEC, 1099-MISC, 1099-K, or another specified statement. The barber reports all $60,000 of business receipts on Schedule C, but Schedule C and bank-deposit records do not by themselves create Section 224 eligibility.

Self-employed mechanics:

• For each self-employed trade or business, limit qualified tips to gross income less all allocable deductions other than the tip deduction itself. Start with the applicable business net profit and subtract other allocable deductions, including the deductible half of self-employment tax and applicable self-employed health-insurance and retirement-plan deductions; Schedule C line 31 alone may overstate the ceiling.
• Tips must be voluntary. Mandatory salon service charges, automatic gratuities on packages, and added-on 'service fees' do not qualify.
• For Section 224, apply Notice 2025-69's temporary SSTB transition rule while the final-regulation subsection remains reserved. That treatment does not itself decide the barber business's separate Section 199A classification.
• Apply the direct-ownership anti-abuse rule to the payor: at least 5% of corporate vote/value or partnership profits/capital, or more than 5% beneficial ownership of another entity, triggers irrebuttable recharacterization when the amount is received.

Booth renter / cash-tip documentation: Daily tip logs, POS reports, receipts, and deposit records remain important substantiation, but they do not replace the 2026 separate-information-statement rule. Notice 2025-69 provides a different 2025 transition path only when a nonemployee's tips were included in an applicable aggregate 1099 box and corroborating records reconstruct the amount. A booth renter with no applicable 2026 statement cannot create eligibility merely by issuing no form to themselves and using the daily-log total.

Neither the tip deduction nor a booth-rental label determines employee or independent-contractor status. Apply the actual federal and New Jersey tests; Schedule C expenses, QBI, payroll and self-employment tax follow supported classification facts. Routing distributions, draws or K-1 income through owner payroll does not turn those amounts into qualified tips or bypass the direct-ownership rule.

Greg Monaco, CPA: Track every tip and report all business income, whether or not a payer issues a form. Then test deduction eligibility separately. For 2026, first locate the separately reported qualified-cash-tip amount and TTOC; use the logs and POS records to corroborate that statement, not to replace it.

The NJ Conformity Problem

On December 1, 2025, the New Jersey Division of Taxation published official OBBBA guidance confirming that the new federal tip, overtime, and senior deductions 'do not affect a taxpayer's New Jersey Individual Income Tax return.' This is now controlling state-level guidance. All tip income earned in New Jersey remains fully taxable under the NJ Gross Income Tax regardless of any federal §224 deduction claimed. Conformity would require enacted NJ legislation. A1278 (opens in a new tab) and A3691 (opens in a new tab) were introduced in the 2026 session, but neither had been enacted as of September 23, 2026. Pending proposals do not change current NJ return treatment. See also our NJ OBBBA Deductions Conformity Guide for the broader NJ non-conformity picture.

NJ tipped workers therefore face a federal/NJ income split on their 2025 and 2026 returns:

• Federal return (Form 1040): When eligible, report tips as income (they remain in AGI), then claim the allowable below-the-line §224 deduction on Schedule 1-A, which flows to Form 1040 Line 13b on the 2025 form (Line 13a on the 2026 draft) after AGI on Line 11a.
• NJ return (NJ-1040): Report employee tips in NJ wages or self-employed tips in the applicable business-income category. No corresponding §224 deduction applies.

The result is a federal/NJ computation difference that must be reconciled. Do not compare a single 'taxable income' total: Form 1040 and NJ-1040 use different bases, categories, exclusions, and deductions, so their intermediate amounts can differ for reasons beyond Section 224.

Practical impact on NJ estimated taxes: If you make quarterly NJ estimated payments (NJ-1040-ES), do not reduce the NJ computation by the federal tip deduction. Compute the estimate from the applicable NJ income categories, deductions, credits, and payment rules.

Employer Obligations Under the Tip Deduction

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

• W-2 reporting: Box 7 continues to report Social Security tips, but for tax year 2026 the qualified-cash-tip amount is separately identified with W-2 Box 12 code TP and the occupation field. The employer and its payroll provider are responsible for payroll capture, transmission, filings, and W-2 reporting; Monaco CPA may review client-supplied platform reports within a separately accepted written scope; payroll transmission is considered case by case under a separate written engagement.
• 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 remain subject to FICA and can qualify for the employee's §224 deduction when the voluntariness, occupation, reporting, filing-status, ownership, and other requirements are met.
• 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.

Under IRC Section 6053(a), employees receiving $20 or more in cash tips from one employer in a calendar month generally furnish a written or electronic tip statement by the 10th of the next month. A standard statement includes the employee name, address and SSN, employer name and address, reporting period, reportable tips, date furnished and employee signature. An employer's regularly used form or electronic system must meet the applicable alternative requirements in Treas. Reg. Section 31.6053-1. Historical Form 4070 is a possible model, not a required form.

Industries Covered - and Industries That May Not Qualify

The IRS has published the controlling list at Treas. Reg. §1.224-1(h) ('List of Occupations that Receive Tips') and maintains it online at IRS.gov/TippedOccupations (opens in a new tab). Both Schedule 1-A and the regulations reference the same list. Covered occupations include:

• Food and beverage service (servers, bartenders, bussers, food runners, 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, tattoo artists - tattoo artists ARE on the published list)
• Casino dealers and casino service workers
• Taxi and ride-share drivers receiving voluntary passenger tips (the rideshare-app cash-out itself is not a tip; rider gratuities passed through the app are)
• Exercise trainers and group fitness instructors (IRS occupation code 608, including aerobics trainers, yoga instructors, and personal trainers), subject to the other eligibility rules
• Other occupations on the published list (verify your specific occupation at IRS.gov/TippedOccupations)

Payments that do not qualify merely because of the worker's occupation:

• Delivery app workers whose payment is a delivery fee, not a voluntary tip
• Amounts received for pornographic activity, even when the occupation or platform otherwise appears on the list
• Digital assets, property, subscriptions, paywalls, automatic gratuities, and mandatory service charges
• Amounts managers or supervisors receive through a voluntary or mandatory tip-sharing arrangement. A tip a manager receives directly for services performed in a listed tipped occupation can qualify if every other requirement is met
• SSTB treatment requires the separate Section 224 transition analysis described above; do not import a Section 199A label without applying Notice 2025-69 and the reserved final-regulation subsection

When in doubt, look up your specific occupation at IRS.gov/TippedOccupations before claiming the deduction.

How to Claim the Deduction on Your Federal Return

The §224 tip deduction is a below-the-line deduction claimed on the new Schedule 1-A (Form 1040), Part II, which flows to Form 1040 Line 13b on the 2025 form and Line 13a on the 2026 draft (after AGI on Line 11a - confirming the below-the-line placement). You do not need to itemize to benefit. Filers who take the standard deduction get the §224 deduction in addition.

Steps for W-2 workers:

1. Gather all W-2s and any Form 4137. For 2025, use the transition instructions with Box 7, employer statements, and corroborating earnings records. For 2026, locate W-2 Box 12 code TP and the occupation field; other qualified employee tips can use the applicable Form 4137 path.

IRS Publication 531 instructs employees to retain a daily tip record using a diary or documents showing tips. A compliant electronic record, POS report or historical Form 4070A model may help; reconcile it with employer, bank and other available records. The record substantiates the tips without replacing the separate information-statement requirement described above.

1. Confirm your occupation appears on the Treas. Reg. §1.224-1(h) list / IRS.gov/TippedOccupations.
2. Total your qualifying tip income across all employers (the $25,000 cap is per return, including a joint return, not per employer or per spouse).
3. Compute MAGI before §224 and apply the phaseout beginning at $150,000 single or $300,000 MFJ. Being above the starting threshold does not by itself eliminate the deduction; the phaseout lines (10 through 12 on the 2025 Schedule 1-A; 12 through 14 on the 2026 draft) reduce the otherwise allowable amount until it is fully phased out.
4. If married, confirm you are filing MFJ - the deduction is not available for MFS filers.
5. On the 2025 Schedule 1-A Part II, line 7 is the capped qualified-tip amount before the phaseout; lines 10 through 12 compute the phaseout, and line 13 is the resulting deduction that flows to Form 1040 line 13b via the Part VI total (line 38). On the 2026 draft, the same steps are lines 9, 12 through 14, and 15, and the Part VI total (line 44) flows to Form 1040 line 13a.
6. On your NJ-1040, report employee tips in NJ wages or self-employed tips within the applicable NJ business-income computation; do not claim the federal §224 deduction on the NJ return.

Steps for self-employed workers: Same as above except step 1. For 2025 transition relief, confirm the tips were included in an applicable aggregate Form 1099 box and reconstruct the amount with the documentary evidence Notice 2025-69 permits. For 2026, use the separately reported qualified-cash-tip amount and TTOC from the new fields on Form 1099-NEC, 1099-MISC, 1099-K, or another specified statement. A Schedule C total or self-reported log is not a substitute when the required 2026 statement is absent.

Tax-software support and data flow can vary by product, version, return type, and filing period. Verify the completed Schedule 1-A calculation and the Form 1040 line it flows to (line 13b on the 2025 form, line 13a on the 2026 draft) against the current instructions and the taxpayer records. On the NJ side there is no "add-back" to make - the federal deduction is below-the-line and never reduces NJ wages; reconcile the NJ-1040 to full W-2 Box 16 wages or the applicable full NJ business-income category rather than a federal figure net of Schedule 1-A.

Frequently Asked Questions

Disclaimer: This article is provided for general informational and educational purposes only. It does not constitute legal, tax, or financial advice. Tax laws change frequently and the applicability of any information depends on your specific facts and circumstances. Consult a licensed CPA before making any tax-related decisions.

Related Articles: OBBBA Tax Changes for NJ Residents | W-2 vs 1099 in New Jersey | Self-Employment Tax Explained | NJ Tax Changes 2025 | Contact Form

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