New York Proposes Eliminating State Tax on First $25,000 of Tip Income

ALBANY, N.Y. — Governor Kathy Hochul announced a proposal on January 1, 2026, to eliminate New York State income taxes on the first $25,000 of tipped income, a move that would align the state with a similar federal tax break enacted last year. The proposal, which has since been formalized in legislation and is backed by the state Senate and Assembly, is widely expected to be approved in the final state budget. The legislative vehicle for the governor’s proposal is Senate Bill S587-A, introduced on January 8. According to an analysis by the law firm Littler, the bill would amend Section 612 of the New York Tax Law to create a state-level income tax deduction for cash and credit card tips. If enacted as written, the change would apply to taxable years beginning on or after January 1, 2026, directly affecting how tipped workers file their state taxes for the current year. This proposal is expressly designed to mirror the federal “One Big Beautiful Bill Act,” which established an above-the-line federal income tax deduction for qualified tips and certain overtime compensation. The push to conform New York’s tax code came after Governor Hochul faced political pressure to match the federal policy, which former President Donald Trump had championed. Hochul’s January 1 announcement came just six days after a New York Post story criticized her for not yet adopting the popular tax break. Her Republican opponent, Bruce Blakeman, had accused her of “sticking it to the service industry,” according to reports. The policy has seen broad bipartisan appeal since it was first floated during the 2024 presidential campaign, with both major parties expressing support for the concept. The financial implications for New York are a point of contention. While the governor’s office projects a relatively modest impact on New York City’s budget of $38 million over two years, other estimates place the potential revenue loss significantly higher, at $239 million. Neither the city nor the state has publicly explained the large discrepancy in their fiscal projections. In a statement, Hochul spokesperson Kassandra White said the proposal is intended to help New Yorkers keep more of their earnings. “This proposal grows on the governor’s efforts to put more money back in New Yorkers’ pockets including increasing the minimum wage, delivering inflation refund checks, and cutting middle-class taxes –– making New York more affordable and livable,” White said. The proposal has garnered significant support from business groups and companies that rely on tipped or gig-economy workers. In a joint letter to state leaders on May 4, DoorDash joined organizations including the NYC Hospitality Alliance, the Business Council of New York, and several regional chambers of commerce to advocate for the policy. “The No Tax on Tips proposal offers meaningful tax relief by allowing workers to retain more of their hard-earned money at a time when rents, groceries, childcare, transportation, and general living expenses burden too many New Yorkers,” the letter stated. DoorDash noted that under the federal law, its delivery drivers, or “Dashers,” have already saved hundreds of millions of dollars nationwide. Extending the tax break to the state level, the company argued, would provide significant economic relief for its New York workers. One Dasher from Cortland, Lynne, was quoted as saying the federal tax break turned a potential tax liability into a refund. Despite the populist appeal and business backing, some tax policy experts have expressed skepticism, according to NYS Focus, calling the policy potentially unfair and questioning whether it helps the workers most in need. Labor unions have reportedly remained on the sidelines of the debate. While the direct benefit to employees is clear, the implementation presents new operational hurdles for businesses. Employers in the hospitality and service sectors will now face a bifurcated payroll withholding and reporting system. They must continue to withhold for federal FICA taxes on all tips, but will need to adjust state income tax withholding to account for the new $25,000 deduction. This requires careful tracking and could complicate payroll software configurations and year-end W-2 reporting, creating potential for errors if not managed correctly. In our experience, such changes, even when positive for employees, often translate into an immediate compliance burden for small and mid-sized business owners who may lack dedicated payroll departments. Navigating these new complexities requires proactive adjustments to ensure accurate tax remittance and reporting. For companies grappling with these new state-specific rules, specialized tax preparation and compliance services become essential. Business owners can learn more about managing these obligations from C&S Finance Group LLC at csfinancegroup.com. With strong support in both houses of the state legislature, the proposal to eliminate state tax on tips is expected to become law as part of the final budget agreement. Businesses and tax professionals will be closely watching for the final legislative language and, more importantly, for detailed implementation guidance from the New York State Department of Taxation and Finance on how employers should administer the new deduction.