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. NJ Division of Taxation issued official guidance on December 1, 2025 confirming NJ does NOT conform. Last reviewed: May 2026 by Greg Monaco, CPA. Updated to reflect 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 2025 Federal Return
8. Frequently Asked Questions
9. Ready to File With Confidence?

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. Circular 230 applies.

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.

Two distinctions matter. First, the deduction is below-the-line: it reduces taxable income but does NOT reduce AGI. This is the most common §224 misconception. EITC, CTC, IRA deductibility, student loan interest, and other benefits that phase out by AGI or MAGI are unchanged by claiming §224. Second, the federal tax savings depend on your marginal bracket. A $22,000 tip deduction at the top of a single filer's 12% bracket saves roughly $2,640; if some of the tips fall in the 22% bracket the savings is higher. The simple multiplication ($22,000 × 22% = $4,840) overstates the savings for most servers because tip income typically crosses bracket boundaries. The deduction is also not a dollar-for-dollar credit, and it does not apply to Social Security and Medicare taxes (FICA). Our tax preparation services help NJ hospitality workers claim the full federal tip deduction while navigating NJ's non-conformity.

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. 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. Self-employed workers report qualified tips on Schedule 1-A line 5 using Form 1099-NEC Box 1, Form 1099-MISC Box 3, or Form 1099-K Box 1a.

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 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(c))
• $300,000 for married filing jointly (fully phased out at $550,000 MAGI)

The phase-out reduces the maximum deduction by $100 for every $1,000 of MAGI above the threshold (10% rate per IRC §224(c)). 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). Most tip workers earning primarily from service income will be well below these thresholds.

Employer requirements (W-2 path): 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. For W-2 workers, Schedule 1-A Part II line 4a captures qualified tips included on W-2 Box 7 (Social Security tips). Schedule 1-A line 4b separately captures qualified tips not subject to Social Security/Medicare (so they would not appear in Box 7) that are still reported elsewhere on the W-2. Box 8 (allocated tips) is the employer-assigned amount under Form 8027 mechanics for large food and beverage establishments and does NOT itself qualify as reported tips for §224 unless the employee actually reported those tips. Tips reported only by the employee on Form 4137 (employee-reported unreported tips) do NOT qualify.

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 Social Security Number by the original due date of the return. ITINs do not qualify.
• MFJ required if married: Married taxpayers must file jointly. MFS filers are ineligible for §224.
• SSTB exclusion: Tips received in a 'specified service trade or business' (per IRC §199A(d)(2): health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment management) are excluded. Note that personal care, hospitality, and food/beverage services are NOT SSTBs and DO qualify.
• 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.
• Tip pool / owner exclusion: Tips paid to managers, supervisors with significant management authority, or 5%-or-greater owners of the business do NOT qualify. A 5%-or-greater ownership relationship between the tip recipient and the business triggers an irrebuttable recharacterization presumption (the receipt is treated as compensation, not a tip).

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, 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. The earlier '$3,441 at the 22% marginal rate' framing overstates the benefit because all of the $22,000 tip income falls inside the 10%/12% brackets, not the 22% bracket.

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 ~$2,800. 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) explicitly allow self-employed workers in occupations on the IRS tipped-occupations list to claim the deduction. Barbers and cosmetologists ARE on the list. A self-employed NJ barber operating as a sole prop or single-member LLC reports gross Schedule C income of $60,000, separately tracks $15,000 in voluntary client tips, and claims those tips on Schedule 1-A line 5 using the amount reported in Form 1099-NEC Box 1 or 1099-MISC Box 3 (if a client used a service that reports them) or self-reported tip records reconciled to bank deposits.

Self-employed mechanics:

• Schedule C net income (gross minus deductible expenses) must equal or exceed the §224 deduction claimed. The deduction cannot exceed net trade-or-business income.
• Tips must be voluntary. Mandatory salon service charges, automatic gratuities on packages, and added-on 'service fees' do not qualify.
• Barbering is NOT a 'specified service trade or business' under IRC §199A(d)(2), so the SSTB exclusion does not apply.
• The booth renter must own less than 5% of the salon to avoid the irrebuttable owner recharacterization. (For most booth renters this is automatic; for owner-operators, plan carefully.)

Booth renter / cash-tip documentation: Whether you receive electronic tips through a salon POS, Venmo, or cash, the §224 deduction requires contemporaneous records. Daily tip logs reconciled to deposit slips are the audit-defensible standard. Boot-renters who do NOT issue 1099s to themselves still report the income on Schedule C and claim the §224 deduction on Schedule 1-A line 5 based on the daily-log total.

Greg Monaco, CPA: The final regulations resolved the self-employed question in the taxpayer's favor for personal-care occupations. The remaining trap is documentation. The IRS can disallow the §224 deduction if the tip portion of your Schedule C income is not separately substantiated. Build the habit of logging tips daily, reconciling to your weekly deposit, and keeping the log with your Schedule C workpapers.

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 new NJ legislation; none has been introduced as of May 2026. 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): Claim the §224 deduction. Report tips as income (it stays in AGI), then take the below-the-line deduction on Schedule 1-A, which flows to Form 1040 Line 13b after AGI on Line 11.
• 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: Qualifying §224 tips are reported tips that appear primarily in W-2 Box 7 (Social Security tips). Ensure your payroll system correctly captures reported tips in Box 7 (which feeds into Box 1 wages, tips, other compensation). Box 8 (Allocated Tips) is the employer-assigned amount used by large food and beverage establishments under Form 8027 - allocated amounts do NOT qualify for the §224 deduction unless they were actually reported as tips by the employee.
• 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 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. 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)
• Other occupations on the published list (verify your specific occupation at IRS.gov/TippedOccupations)

Occupations not on the list:

• Personal trainers and fitness instructors receiving tips directly from clients (unless reclassified by future IRS guidance)
• Delivery app workers whose payment is a delivery fee, not a voluntary tip
• Occupations in 'specified service trades or businesses' (SSTBs) under §199A(d)(2): law, health, accounting, performing arts, consulting, athletics, financial services, brokerage, investment management
• Managers and supervisors with significant management authority, regardless of occupation

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 (after AGI on Line 11 - 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. Capture tip income from Box 7 (Social Security tips) - this lands on Schedule 1-A Part II line 4a. If you have W-2-reported tips that are NOT subject to Social Security/Medicare (rare; not in Box 7), they go on line 4b.
2. Confirm your occupation appears on the Treas. Reg. §1.224-1(h) list / IRS.gov/TippedOccupations.
3. Total your qualifying tip income across all employers (the $25,000 cap is per taxpayer, not per employer).
4. Verify your MAGI (before §224) is below the phase-out threshold ($150,000 single / $300,000 MFJ).
5. If married, confirm you are filing MFJ - the deduction is not available for MFS filers.
6. Enter the deductible amount on Schedule 1-A Part II line 7 (worksheet calculates phase-out). The result flows to Form 1040 line 13b.
7. On your NJ-1040, include all tip income in your NJ gross income with NO deduction.

Steps for self-employed workers: Same as above except step 1 - report qualified tips on Schedule 1-A line 5 using amounts from Form 1099-NEC Box 1, Form 1099-MISC Box 3, or Form 1099-K Box 1a (or self-reported tip log if no 1099 was issued, reconciled to deposits).

All major tax software (TurboTax, H&R Block, FreeTaxUSA, TaxSlayer, Drake) shipped Schedule 1-A support during the 2025 filing season (Jan-Apr 2026). As of mid-2026 the workflow is mature: enter your tip amount, the software computes the phase-out and writes Line 13b. Verify that your NJ-1040 is correctly adding back the federal deduction so you are not under-reporting NJ income - this is the spot where most NJ software handles the federal/NJ split incorrectly.

Frequently Asked Questions

Ready to File With Confidence?

Tax rules change frequently. If anything in this guide applies to your situation, a quick review with a CPA can prevent costly mistakes. Greg Monaco is a NJ-licensed CPA (License #20CC04711400) who prepares every return personally.

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