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Is California Taxing Tips in 2025? You Betchya!

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Under the leadership of California Governor Gavin Newsom, California is currently planning to continue taxing tips at the state level, even though the federal government, led by President Donald Trump, has eliminated federal income tax on most tips, as he promised during the Presidential Campaign in 2024. .

California’s Social Democrat Progressive mono-party, led by Governor Gavin Newsom, is making sure that California is “Trump-proofed” from common sense supply side economic theory. No lower taxes for food servers, food delivery workers, and the other 70+ jobs and side hustles that earn tips. 

1. The Federal Change (OBBBA)

On July 4, 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law by President Trump. This created a new federal deduction for tipped workers.

  • The Benefit: You can deduct up to $25,000 of qualified tip income from your federal taxes.
  • The Timeline: This applies to the 2025 tax year (the taxes you file in early 2026) and runs through 2028.
  • The Phase-out: The deduction starts to disappear if you make more than $150,000 ($300,000 for married couples).
    • 2. Take-Home & Cost of Living: CA vs. NV (2025)

    Nevada is often called "Ground Zero" for the "No Tax on Tips" movement. Unlike California, Nevada has no state income tax, meaning the federal tax break applies to the worker's entire tax burden on those tips.

    Scenario: A full-time server (2,000 hrs/year) earning $20,000 in tips.

    Feature

    California Server

    Nevada Server

    Hourly Wage

    $16.50

    $12.00

    Annual Base Salary

    $33,000

    $24,000

    Annual Tips

    $20,000

    $20,000

    Gross Income

    $53,000

    $44,000

    Federal Income Tax

    $0 (on tips) + Tax on base

    $0 (on tips) + Tax on base

    State Income Tax

    ~$500 - $800

    $0 (No state tax)

    FICA (SS/Medicare)

    ~$4,050

    ~$3,360

    Estimated Take-Home

    ~$45,500

    ~$38,200

    Whose Salary Goes Farther?

    While the California server takes home roughly $7,300 more in cash, the "Purchasing Power" varies wildly due to the Cost of Living (COL):

    • Housing: On average, rent in major California hubs (LA, SF, SD) is 30%–50% higher than in Las Vegas or Reno. A $2,500 apartment in California might cost $1,600 in Nevada.
    • Taxes & Energy: California has the highest gas taxes and some of the highest utility rates in the US. Nevada’s lack of state income tax and lower energy costs act as a "hidden raise."
    • The Verdict: If both servers live in major cities, the Nevada server's salary often goes farther. The $7,300 "California Wage Gap" is frequently swallowed up by higher rent and gas prices, meaning the Nevada server may have more discretionary income at the end of the month.
      • 3. The California Conflict

      California does not automatically follow federal tax changes. The state must pass its own laws to "conform" to federal rules.

      • State Stance: As of late December 2025, Governor Newsom and state leadership have indicated that California will not adopt the "No Tax on Tips" deduction for state income tax.
      • The Reason: State officials have cited the high cost of the deduction (estimated at billions in lost state revenue) and a desire to keep those funds for public programs.
      • The Impact: When you file your taxes in 2026, you will likely see a lower federal bill, but your California state tax bill will stay roughly the same as it was in previous years.
        • 4. What Counts as a "Tax-Free Tip"?

        Under the new federal rules (which California is currently ignoring), the IRS has clarified what qualifies:

        • Voluntary Only: The tip must be voluntary. Mandatory service charges (like an automatic 18% gratuity for large parties) are still taxable at both the federal and state levels.
        • Eligible Occupations: The Treasury Department released a list of nearly 70 eligible jobs, including servers, bartenders, delivery drivers, and salon workers.
        • Documentation: You must still report all tips to your employer. The "no tax" part happens as a deduction when you file your return.
          • Comparison Summary (2025 Tax Year)

          Tax Type

          Status

          Maximum Deduction

          Federal Income Tax

          Exempt

          Up to $25,000

          Federal Payroll Tax (SS/Medicare)

          Taxed

          N/A (Still applies)

          California State Income Tax

          Taxed

          None

          What to Watch For

          Because this is a major political issue, there is still a chance of "last-minute" legislation in Sacramento early in 2026 before the filing deadline. However, unless the California Legislature passes a specific conformity bill, expect to pay state tax on every dollar of tips you earn.

          In a land of $5 gasoline, $2,000 studio apartment rent, and exorbitant prices for food, energy, insurance, and so on, and even with a $16.50 minimum wage the extra cash in the hands of California consumers and not in the coffers of an overspending and wasteful state government, with no apparent mechanism for accountability, would be a more humane, direct, and effective way to assist California’s hourly wage and tip earners.

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          The Active CenterBy David Sepe