Your tipped employees have heard about “no tax on tips” from the federal law. Now New York has its own version, and it stacks on top of the federal one. Two separate deductions, two separate returns, and — this is the part owners get wrong — zero change to what you owe on payroll.
What New York Actually Did
New York is what’s called a “static conformity” state. It doesn’t automatically pick up every new federal tax break the moment Washington passes one — lawmakers have to vote to adopt it. For most of 2025, New York had no plan to conform to the federal “no tax on tips” provision from the One Big Beautiful Bill Act.
That changed. Governor Hochul’s Fiscal Year 2027 budget, signed into law May 28, 2026, added New York’s own income tax deduction for qualified tip income, running parallel to the federal one, for tax years beginning in 2026. Same $25,000 ceiling, same underlying definition of a qualifying tip — but it lives on the New York return, separate from the federal deduction your employees already knew about.
Practically: an employee who qualifies gets to subtract the same tip income twice — once on the federal 1040, once on the New York return. That’s a real number. A server or bartender who reports $22,000 in tips for the year gets that amount excluded from taxable income on both returns. At New York’s mid-bracket rate, that’s somewhere in the $1,300–$1,500 range in additional state tax savings, on top of whatever the federal deduction already saved them.
What This Doesn’t Change
Don’t confuse “no tax on tips” with “no tax on tips, period.” Nothing here touches FICA. You still withhold and match 7.65% in Social Security and Medicare on every reported tip dollar, same as before. New York’s SUI contributions on tip wages don’t move either. This is an income tax deduction your employee claims when they file their own return — not a payroll tax exemption, and not a reason to change anything in your withholding setup.
If you run a restaurant, salon, or any business with tipped staff on Long Island, the state and federal deductions now depend on the same underlying records. See how we handle payroll compliance for tipped and hourly employees.
Why Your Records Matter More Now, Not Less
Both deductions — federal and state — depend entirely on accurate tip reporting. Your 2026 W-2s already have to carry a Treasury Tipped Occupation Code identifying which employees work in a qualifying tipped role, plus the tip amount broken out correctly. That’s a federal filing requirement, not optional, and it’s the same underlying data New York’s deduction rides on.
Get the coding wrong, or let a manager keep lumping tips into regular wages on the back end, and you haven’t just created a federal reporting problem — you’ve now cost your tipped employees access to a second deduction they didn’t know they were entitled to. They’ll find out when their preparer asks why the number on their W-2 doesn’t support the deduction they read about online, and the first call they make is to you.
The distinction that still trips owners up: a voluntary tip your customer leaves is a qualifying tip. An automatic 18%–20% gratuity your point-of-sale system tacks onto a table of eight is a mandatory service charge — it’s still wages, and it doesn’t qualify for either deduction, federal or state. If your POS is set up to auto-add gratuities on larger parties, that’s worth a hard look before your tipped staff start asking why their “tips” aren’t showing up as tips.
The Bottom Line for Long Island Employers
New York didn’t have to conform to this federal provision, and for most of 2025 it looked like it wouldn’t. It did, retroactive to the start of the 2026 tax year, which means the payroll and recordkeeping decisions you make right now determine whether your tipped staff actually get the state benefit lawmakers just gave them. This is a records problem, not a withholding problem — but it’s still your problem to get right.
Not sure your payroll system is tracking tips the way both the federal and New York deductions now require? Schedule a call and we'll walk through your setup before it becomes a headache for your staff at filing time.
This post is for general educational purposes and does not constitute tax or legal advice for your specific situation. It reflects New York's Fiscal Year 2027 budget, signed into law May 28, 2026, and the federal "no tax on tips" provision under the One Big Beautiful Bill Act (Public Law 119-21, signed July 4, 2025), as understood as of publication. Both are subject to further guidance from the IRS and the New York State Department of Taxation and Finance. Consult a qualified tax professional before making decisions based on this content. Geiger Tax & Accounting, Amityville, NY — serving clients nationwide.