New York Governor Proposes “No Tax on Tips” Legislation

New York Governor Kathy Hochul recently announced a proposal to eliminate state income taxes on a portion of tipped income, signaling a significant policy development with meaningful implications for New York employers, particularly those in the hospitality, service, and delivery industries. Consistent with this announcement, on January 8, 2026, the New York State Legislature introduced Senate Bill S587-A, which is currently pending before the Senate Committee on Budget and Revenue. 

While framed as an affordability measure for workers, the proposal raises important compliance considerations for New York employers navigating the intersection of federal tax law, state tax law, and longstanding wage-and-hour obligations governing how tips are tracked and classified.

Overview of the Governor’s Proposal and Pending Senate Legislation

Governor Hochul’s proposal would eliminate New York State income taxes on up to $25,000 of tipped income for the 2026 tax year, beginning January 1, 2026. In furtherance of that proposal, Senate Bill S587-A would amend Section 612 of the New York Tax Law to allow taxpayers to deduct the amount of cash and credit card tips received during the taxable year that are “considered wages or compensation” under the Internal Revenue Code. If enacted, the legislation would apply to taxable years beginning on or after January 1, 2026, and would operate as a state-level income tax deduction.

Relationship to Federal Law: The One Big Beautiful Bill Act

Governor Hochul’s proposal is expressly intended to mirror the provisions of the federal One Big Beautiful Bill Act (OBBBA), which established above-the-line federal income tax deductions for both “qualified tips” and “qualified overtime compensation.”

Under the OBBBA, “qualified tips” generally include voluntary cash or charged tips received by employees from customers or through tip-sharing arrangements in occupations that customarily and regularly receive tips. In addition, the OBBBA allows eligible employees to deduct certain qualified overtime compensation, subject to statutory caps and income phase-outs. These deductions apply for federal income tax purposes only.

Importantly, eligibility for the federal income tax deductions established by the OBBBA, and the amount of any deduction, is determined by the individual taxpayer, subject to income thresholds and other statutory requirements. As currently drafted, however, Senate Bill S587-A does not expressly incorporate similar income-based limitations or clarify whether the deduction would be confined to the same categories of tipped occupations recognized under the OBBBA, leaving open questions regarding whether Governor Hochul’s proposal will ultimately align with federal eligibility rules. 

Employer Wage Reporting Obligations Under Federal Law

Because the OBBBA applies to both tips and overtime, the statute necessarily imposes more expansive employer reporting obligations than those contemplated under Governor Hochul’s proposal.

As previously reported, beginning in the 2026 tax year employers will be required to assist in substantiating employees’ eligibility for the new federal deductions through enhanced wage reporting. Specifically, employers must separately report qualified tips and overtime compensation on a newly revised W-2 Form. These reporting obligations are intended to enable employees to claim qualified tip and overtime deductions on their own individual income tax returns. 

Notably, however, the OBBBA does not change employers’ obligations to: 

• Comply with existing minimum wage and overtime rules, including tip-credit requirements under the Fair Labor Standards Act and state law;
• Withhold and remit federal income taxes and FICA taxes (Social Security and Medicare) on tips and overtime compensation, even if an employee may later qualify for a deduction on their personal tax return; or
• Maintain accurate payroll and timekeeping records.

While tips are not generally treated as “wages” for wage-and-hour purposes, the portion of tips used to satisfy a tip credit remains relevant for minimum wage compliance, and tips remain taxable compensation subject to withholding and reporting requirements. 

In short, while the OBBBA introduces a new layer of wage reporting complexity, it does not alter employers’ underlying obligations to properly pay, track, withhold, and report compensation. 

Key Considerations for New York Employers

Governor Hochul’s proposal represents a politically and economically significant development for New York’s service economy, but its practical impact will depend on the final statutory language, accompanying regulations, anticipated guidance, and coordination with the tip and overtime wage reporting requirements under federal law. Employers should be mindful of several key considerations:

• Federal and state tax deductions for employees do not alter employers’ wage-and-hour obligations. Tips and overtime compensation remain subject to federal and state payroll tax withholding and must continue to be paid, tracked, and reported in accordance with existing law.
• Employers may face increased scrutiny regarding wage reporting accuracy, particularly where employees seek to maximize the benefit of the new deduction or exemption. Employers must ensure that their payroll systems can accurately capture and report both qualified tips and overtime compensation.
• Clear employee communications will be critical, as employees may incorrectly assume that “no tax on tips” means the tips are no longer reportable or subject to payroll rules.
• Employers should coordinate early to ensure accurate reporting and to avoid downstream compliance issues once revised W-2 forms are fully implemented.

We will continue to track these developments and provide updates as the governor’s proposal and Senate Bill S587-A move through the legislative process. Employers, however, should consult with experienced employment and tax counsel to ensure compliance with evolving reporting requirements and to avoid unintended wage-and-hour or payroll tax exposure ahead of the 2026 tax year.