Tips, overtime and your California tax return
Updated November 1, 2026. Written for California owners, workers and freelancers; not legal or tax advice.
If you live in California, the new federal deductions only cut your federal tax bill. California sets its own income tax rules and doesn't automatically follow federal changes.
Current status
As of November 1, 2026, California has not conformed to the federal deductions for qualified tips or qualified overtime. Tips and overtime remain fully taxable on Form 540. Bills proposing a California version (including AB 1550 and SB 984 in 2026) were introduced and analyzed by the Franchise Tax Board, but none had been enacted when we last checked. Check the FTB's legislation page before you file.
What it means for you
- Your California tax doesn't drop. If tax software shows a bigger refund after you enter tips, that's the federal return.
- Don't cut your state withholding. If you adjust your federal W-4 to take home more, leave your California DE 4 alone unless something else changed.
- Payroll taxes still apply. Social Security, Medicare and California SDI are still withheld on tips and overtime.
Example
A single server with $40,000 in wages and $20,000 in tips (MAGI $60,000):
| Federal | California | |
|---|---|---|
| Tips deduction | $20,000 | $0 |
| Income taxed | $60,000 − $16,100 − $20,000 = $23,900 | $60,000 − CA standard deduction |
| Effect | About $2,400 less federal tax | No change |
Withholding check for 2026
Your employer can't apply these deductions to your withholding on its own. It withholds based on your Form W-4. If you expect a large deduction, you can:
- Take the bigger federal refund in 2027, or
- Use the IRS Tax Withholding Estimator and adjust your W-4 (Step 4(b), deductions) so less is withheld during the year
Be conservative with the second option. If your employer's TP or TT reporting is off, or your income moves you into the phase-out, you could owe at filing.
Freelancers and gig workers
Self-employed people with tips (for example, delivery drivers or stylists who rent a chair) can't deduct more than the business's net profit, and the deduction doesn't reduce self-employment tax. California still taxes the full amount, so estimated payments to the FTB shouldn't be reduced. See our quarterly tax calculator.
The New Deductions Workbook shows federal and California side by side, so you can see what changes and what doesn't.