No Tax on Tips and Overtime: The OBBB §§224 and 225 Deductions, State Conformity, and W-2 Reporting

The OBBB "no tax on tips" and "no tax on overtime" deductions are federal income-tax deductions, not wage exclusions — FICA still applies on every dollar, and in 46 jurisdictions the deductions never touch state taxable income at all.

The One Big Beautiful Bill Act of 2025 enacted IRC §§ 224 (qualified tips) and 225 (qualified overtime) at section 70401 of P.L. 119-21, signed July 4, 2025. Both deductions are capped (single returns: $25,000 tips / $12,500 overtime), MAGI-phased above $150,000 single / $300,000 joint, and sunset for tax years beginning after December 31, 2028 (§§ 224(d), 225(g)).

Both live on the new Schedule 1-A (Additional Deductions) and flow to Form 1040 line 13b — below adjusted gross income on line 11b. The below-the-line placement is the load-bearing mechanic for state conformity: 31 AGI-starting states + DC import federal AGI as their state-tax starting point and never see the §§ 224/225 reduction. Only five federal-taxable-income-starting (FTI) states — Colorado, Idaho, North Dakota, Oregon, South Carolina — pass the deductions through automatically. Colorado decoupled from § 225 (but not § 224) via HB 25-1296, signed May 16, 2025, before OBBB itself was enacted.

The Treasury Department published final regulations on April 13, 2026 — T.D. 10044, 91 Fed. Reg. 19026 — enumerating roughly 70 § 224-qualifying occupations under three-digit Treasury Tipped Occupation Codes (TTOCs) and defining "cash tips" to include credit card, debit card, gift card, and most mobile-payment-app payments while excluding service charges, automatic gratuities, and digital assets. The 2026 W-2 introduces Box 12 code TP (qualified tips), Box 14b (TTOC, up to 2 codes), and Box 12 code TT (qualified overtime premium) under IRC § 6051(a)(18) and (19), with $310 per-W-2 § 6721 information-return penalties for misreporting.

The interaction with the FLSA tip credit at 29 USC § 203(m) and the FLSA overtime requirement at § 207 is mechanical, not substantive. Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (5th Cir. Aug. 23, 2024), vacated the DOL's 80/20/30 tip-credit rule and reshaped the framework that runs underneath § 224 reporting. § 225(c)(1)'s "required under section 7 of the Fair Labor Standards Act" clause excludes California daily 8-hour overtime, daily double-time, and 7th-consecutive-day premiums from the federal overtime deduction — even though they're certainly overtime in the ordinary sense.

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Quick reference

IRC § 224 — qualified tips

• Statute: 26 USC § 224, enacted by OBBB § 70401 (P.L. 119-21, July 4, 2025).
• Cap: $25,000 per return (single or joint) under § 224(b)(1).
• MAGI phase-out: $100 reduction per $1,000 above $150,000 (single) / $300,000 (joint); fully phased out at $400,000 / $550,000 (§ 224(b)(2)).
• Tax years available: 2025–2028. Sunset under § 224(d).
• Eligibility floor: occupation must have "customarily and regularly received tips on or before December 31, 2024" (§ 224(c)(1)).
• Final regulations: T.D. 10044, 91 Fed. Reg. 19026 (Apr. 13, 2026; effective June 12, 2026), enumerating 70+ qualifying occupations.
• Reporting: 2026 W-2 Box 12 code TP (qualified tip total) + Box 14b TTOC (up to 2 codes).
• Anchor case: Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (5th Cir. Aug. 23, 2024) — vacated the DOL 80/20/30 tip-credit rule.

IRC § 225 — qualified overtime

• Statute: 26 USC § 225, enacted by OBBB § 70401 (P.L. 119-21, July 4, 2025).
• Cap: $12,500 single / $25,000 joint under § 225(b)(1).
• MAGI phase-out: same thresholds as § 224; fully phased out at $275,000 single / $550,000 joint.
• Tax years available: 2025–2028. Sunset under § 225(g).
• Eligibility floor: overtime compensation "required under section 7 of the Fair Labor Standards Act" at a rate "in excess of the regular rate" (§ 225(c)(1)). Only the 0.5× premium portion qualifies — not the full 1.5× check.
• Reporting: 2026 W-2 Box 12 code TT (qualified overtime premium) under IRC § 6051(a)(19).
• State passthrough (4 states): Oregon (affirmatively retained via SB 1507), Idaho, North Dakota, South Carolina (passive).
• State decoupling (1 FTI state): Colorado — HB 25-1296, signed May 16, 2025.

Shared mechanics

• Below-the-line placement: both deductions live on Schedule 1-A, flow to Form 1040 line 13b after AGI is fixed on line 11b. This is the load-bearing mechanic for state non-conformity in AGI-starting states.
• FICA, withholding, employer payroll taxes unchanged: §§ 224/225 are individual-side income-tax deductions only.
• State conformity diverges in 2 states: Colorado conforms to § 224 (tips) but decoupled from § 225 (overtime) via HB 25-1296. New York SB S587-A proposes a state-level tip exemption with no overtime parallel.
• § 6721 information-return penalty: $310 per incorrect or omitted W-2; $630 if intentional; capped at $3,783,000 per employer per year (2026 figures).

The 7 most expensive OBBB-deduction mistakes

1. Treating the deduction as "no tax." §§ 224 and 225 are federal income-tax deductions, not wage exclusions. Every dollar of tip income and every dollar of overtime premium remains subject to FICA — 7.65% employee + 7.65% employer under 26 USC §§ 3101 and 3111 — and to federal income-tax withholding under IRS Publication 15 (Circular E) tables, which the final regulations did not adjust. Workers who expect bigger paychecks are reading the marketing, not the statute. The benefit lands on Form 1040 at filing time on Schedule 1-A.

2. Reporting service charges in Box 12 code TP. Service charges, automatic gratuities, "kitchen appreciation fees," and mandatory banquet gratuities are wages, not tips. IRS Fact Sheet FS-2015-08, Rev. Rul. 2012-18, and T.D. 10044 control. Including service-charge income in Box 12 inflates the worker's apparent § 224 deduction and triggers § 6721 information-return penalties.

3. Reporting the full 1.5× overtime amount in Box 12 code TT. § 225(c)(1) restricts the deduction to the 0.5× premium portion. A worker earning $25/hour regular receives $37.50/hour for FLSA overtime; the deductible portion is the $12.50/hour increment, not the entire $37.50. Reporting the full 1.5× amount inflates the deduction by 3× and triggers IRS notice.

4. Treating state daily overtime as § 225-qualifying. § 225(c)(1) is dispositive: only FLSA § 7-required weekly-over-40 overtime qualifies. California daily 8-hour overtime, California daily double-time, 7th-consecutive-day premiums, Oregon manufacturing 10-hour daily overtime under ORS § 653.265, Colorado COMPS Order 12-hour daily overtime, Hawaii public-works 8-hour daily overtime, North Dakota oilfield 8-hour daily overtime, and CBA premiums above the FLSA floor all fail § 225(c)(1). Box 12 code TT should report the FLSA-floor portion only.

5. Coding a non-qualifying occupation with a qualifying TTOC. § 224(c)(1) is explicit: the occupation must have "customarily and regularly received tips on or before December 31, 2024." Treasury cannot expand the enumerated list to industries that began tipping after that date without statutory amendment. The IRS draft 2026 W-2 instructions direct employers to code non-qualifying occupations with TTOC "000"; coding a non-qualifying worker with TTOC 102 (Wait Staff) to "help" them claim the deduction is a § 6721 violation.

6. Assuming federal §§ 224/225 reduce state taxable income. §§ 224 and 225 are below-the-line deductions on Schedule 1-A flowing to Form 1040 line 13b — they do not reduce federal AGI. States that compute taxable income from federal AGI (31 states + DC) pass through no benefit absent affirmative state legislation. Only five FTI-starting states (Colorado, Idaho, North Dakota, Oregon, South Carolina) pass through automatically — and Colorado decoupled from § 225 via HB 25-1296. Workers in California, where SB 711 (Chapter 231, 2025) set the IRC conformity date to January 1, 2025 — before OBBB enactment — pay California income tax on the full tip and overtime amounts regardless of the federal deductions.

7. "My state passed a decoupling bill, so it must address § 225." Not always. Massachusetts HB 4975 (Healey, January 15, 2026) proposes non-conformity to OBBBA but addresses IRC §§ 174A, 163(j), 168(n), 179(b), and 1400Z — not § 225. Virginia HB 29 (Chapter 7 of 2026 Acts, signed February 20, 2026) sets Virginia's static conformity date to December 31, 2025 and decouples from §§ 168(k), 168(n), 174 / 174A, 163(j) — but does not address § 225. In both states, § 225 has no state effect anyway because both are AGI-starting; the press framing conflates structural non-passthrough with statutory non-conformity.

The federal floor

IRC § 224 — qualified tips

26 USC § 224 was added by OBBB § 70401. § 224(a) establishes the deduction:

"There shall be allowed as a deduction an amount equal to the qualified tips received during the taxable year that are included on statements furnished to the individual pursuant to section 6041(d)(3), 6041A(e)(3), 6050W(f)(2), or 6051(a)(18), or reported by the taxpayer on Form 4137 (or successor)."

The four cross-referenced reporting statutes are the W-2, 1099-NEC, 1099-MISC, and 1099-K reporting paths. Form 4137 (Social Security and Medicare Tax on Unreported Tip Income) is the worker-side catch-all for tips the worker did not report to the employer at the § 6053(a) threshold.

§ 224(c)(1) defines "qualified tips":

"The term 'qualified tips' means cash tips received by an individual in an occupation which customarily and regularly received tips on or before December 31, 2024, as provided by the Secretary."

§ 224(c)(2) expands the cash-tips definition: "tips received from customers that are paid in cash or charged and, in the case of an employee, tips received under any tip-sharing arrangement." T.D. 10044 further extends "cash tips" to include cash, check, credit card, debit card, gift card, electronic settlement or mobile-payment application denominated in cash (Venmo, PayPal, Cash App, Zelle), and tangible or intangible tokens readily exchangeable for a fixed amount in cash — casino chips are the named example. Service charges, automatic gratuities, and digital assets are excluded.

IRC § 225 — qualified overtime

§ 225(a) establishes the deduction:

"There shall be allowed as a deduction an amount equal to the qualified overtime compensation received during the taxable year."

§ 225(c)(1) defines "qualified overtime compensation":

"For purposes of this section, the term 'qualified overtime compensation' means overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act of 1938 that is in excess of the regular rate (as used in such section) at which such individual is employed."

Two phrases in § 225(c)(1) do the load-bearing work:

• "Required under section 7 of the Fair Labor Standards Act" restricts qualifying overtime to FLSA-required weekly-over-40 overtime. Excludes California daily 8-hour overtime (Labor Code § 510), California daily double-time, 7th-consecutive-day premiums (CA, KY), Oregon manufacturing 10-hour daily overtime, Colorado COMPS Order 12-hour daily overtime, Hawaii public-works 8-hour daily overtime, North Dakota oilfield 8-hour daily overtime, CBA premiums above the FLSA floor, and exempt-employee "policy overtime."
• "In excess of the regular rate" restricts the deduction to the 0.5× premium portion only — not the full 1.5× overtime check. A worker earning $25/hour regular receives $37.50/hour for FLSA overtime; the deductible portion under § 225 is the $12.50/hour increment.

Shared mechanics — cap, phase-out, sunset

§ 224(b) and § 225(b) share a parallel cap-and-phase-out structure:

Modified adjusted gross income for both §§ 224 and 225 equals AGI plus the § 911 foreign earned income exclusion, the § 931 possessions exclusion, and the § 933 Puerto Rico exclusion.

Below-the-line placement — the load-bearing mechanic for state conformity

Both deductions reduce federal taxable income; neither reduces federal AGI. They live on new Schedule 1-A (Additional Deductions), flowing to Form 1040 line 13b after AGI is fixed on line 11b. The federal computation chain:

Line 11b  Federal AGI                       (unchanged by §§ 224, 225)
Line 12   Standard deduction
Line 13a  QBI deduction (§ 199A)
Line 13b  Schedule 1-A additional deductions (INCLUDES §§ 224, 225)
Line 15   Taxable income

State income-tax computation imports one of those federal numbers as its starting point. The starting point determines whether §§ 224/225 have any pathway into the state base at all.

The structural choice has two operational consequences. First, AGI-based phase-outs of other deductions and credits (Saver's Credit, Earned Income Tax Credit cliffs, IRA deduction phase-outs) are unaffected — AGI is the same with or without §§ 224/225. Second, state-conformity passthrough depends entirely on whether the state computes taxable income from federal AGI or federal taxable income.

Final regulations and IRS guidance

• T.D. 10044 — Final regulations on § 224 qualifying occupations and cash-tips definition, 91 Fed. Reg. 19026 (Apr. 13, 2026), effective June 12, 2026. Preceded by proposed regulations at REG-110032-25 (90 Fed. Reg. 45624, Sept. 22, 2025).
• IRS Notice 2025-69 (Nov. 21, 2025) — 2025 transition relief. 2025 Forms W-2 and 1099-NEC unchanged; employees self-calculate the deductions; employers may voluntarily report qualifying amounts in Box 14 with suggested labels ("Qualified tips" / "Qualified overtime").
• IRS Notice 2025-62 — penalty relief for non-disclosure during the 2025 transition window.
• IRS Fact Sheet FS-2026-04 (March 2026) — Schedule 1-A taxpayer-side explainer covering the OBBB additional deductions for tips, overtime, car loan interest, and seniors.
• IRS § 225 Q&A — taxpayer-facing Q&A on the overtime deduction. A parallel § 224-specific Q&A has not been issued as of May 2026; FS-2026-04 plus the Form 1040 line-by-line instructions are the operative § 224 references.
• IRS Rev. Proc. 2025-32 / IR-2025-103 — 2026 inflation adjustments confirming the standard deduction and bracket values used in worked examples.

W-2 reporting — Box 12 codes TP and TT, Box 14b

The IRS 2026 General Instructions for Forms W-2 and W-3 finalize three new boxes:

Critical for the worker's deductions. Per the IRS 2026 W-2 instructions, blank or incorrect reporting in any of these fields can result in IRS rejection of the worker's §§ 224/225 claim. Employers who do not populate Box 14b functionally deny their workers the § 224 deduction; employers who report the full 1.5× overtime in Box 12 code TT (rather than the 0.5× premium) inflate the worker's apparent § 225 deduction.

Withholding implications. None. §§ 224/225 do not affect:

• Income-tax withholding (Circular E tables unchanged).
• FICA withholding (Social Security and Medicare apply on the full wage base).
• § 6053 tip-recordkeeping obligations.
• Employer-side FUTA (§ 3301) and state unemployment insurance.

The deductions land on the worker's 1040 at filing time on Schedule 1-A. Paychecks are unchanged; tax refunds (or smaller balances due) at filing time are where the benefit shows up.

§ 6721 penalty exposure for misreporting

Information-return penalties under 26 USC § 6721 apply to incorrect or omitted reporting in any of the new fields:

• Per-W-2 penalty (2026): $310 per incorrect or omitted information return.
• Annual cap: $3,783,000 per employer per year.
• Doubled for intentional disregard: $630 per W-2.
• Voluntary correction within 30 days: per-W-2 penalty reduced to $60.

Qualifying scope — TTOCs for § 224, FLSA § 7 for § 225

§ 224 qualifying occupations (TTOCs)

T.D. 10044 enumerates approximately 70 occupations that meet the § 224(c)(1) "customarily and regularly received tips on or before December 31, 2024" test. Each occupation is assigned a three-digit Treasury Tipped Occupation Code (TTOC), grouped into seven categories:

• Food and beverage service — Bartenders (TTOC 101), Wait Staff (TTOC 102), hosts/hostesses, bussers, baristas, food runners, sommeliers.
• Hospitality — bellhops, concierges, valets, hotel housekeepers.
• Beauty and personal care — Barbers, Hairdressers, Hairstylists, and Cosmetologists (TTOC 603); manicurists, estheticians, massage therapists.
• Transportation — taxi drivers, rideshare drivers, limo drivers, shuttle drivers, tour guides.
• Entertainment — musicians (live venue), DJs, performers, casino dealers.
• Recreation — golf caddies, ski instructors, fishing guides.
• Miscellaneous service — shoeshine workers, doormen, parking attendants, certain delivery drivers.

TTOC 101 covers bartenders who "mix and serve drinks to patrons, directly or through waitstaff." TTOC 102 covers wait staff who "take orders and serve food and beverages to patrons at tables in dining establishment." TTOC 603 covers hairdressers and related beauty workers.

The December 31, 2024 cutoff is locked. § 224(c)(1) restricts the enumeration to occupations that received tips before the cutoff date. Newly tipping occupations do not qualify regardless of how tip income is currently structured; Treasury cannot expand by regulation — adding new occupations requires congressional amendment.

Multi-occupation workers. A worker performing in two qualifying occupations in the same year — bartender 60%, server 40% at the same employer — qualifies for § 224 on both tip streams. The 2026 W-2 instructions permit up to 2 TTOCs in Box 14b. When the worker's occupations span qualifying and non-qualifying categories, the employer must allocate tip income by occupation. Tips received in non-qualifying work get coded with TTOC "000" and are excluded from Box 12 code TP.

§ 225 qualifying overtime — FLSA § 7 only

§ 225(c)(1)'s "required under section 7 of the Fair Labor Standards Act" clause is dispositive of every industry-specific premium that's not a FLSA-§ 207-required premium. The federal deduction has the same scope in every state for the same FLSA-overtime computation — but the kinds of premiums that don't qualify vary by industry:

• Healthcare 8-and-80. Hospitals and residential-care establishments may use a 14-day work period under 29 U.S.C. § 207(j). FLSA-required overtime under § 207(j) is over-8-in-a-day AND over-80-in-the-14-day-period; both qualify under § 225(c)(1). State-law healthcare premiums that exceed § 207(j) (e.g., California's daily 8-hour OT plus weekly OT for nurses) include components that do not qualify federally.
• Fire and police § 207(k) work periods. Public agencies may use 7-to-28-day work periods under 29 CFR § 553.230; 53h per 7 days for fire (212h/28 days), 43h per 7 days for police (171h/28 days). FLSA-required premium under § 207(k) qualifies; state-law premiums above qualify only to the extent they correspond to FLSA premium.
• Trucking — Motor Carrier Act exemption. Most over-the-road drivers are exempt from § 207 under 29 U.S.C. § 213(b)(1). Workers subject to the small-vehicle exception (2008 Technical Corrections Act) and to non-driving duties may have FLSA-required overtime that qualifies; pure MCA-exempt drivers have no qualifying overtime.
• Agricultural — § 213(b)(12). Most agricultural workers are exempt from § 207 under 29 U.S.C. § 213(b)(12). State-law agricultural overtime (CA AB 1066, OR HB 4002, WA RCW 49.30.040) produces premium that is not § 207-required and therefore not § 225-qualifying.
• Construction prevailing-wage projects. Davis-Bacon premium pay above § 207 — typically driven by CBAs or state-level prevailing-wage requirements — is excluded from the regular rate under 29 U.S.C. § 207(e)(5) and does not qualify for § 225.

The pattern: § 225 qualifies the FLSA-floor portion of premium. State-law overlays above the FLSA floor do not qualify, even if they're paid for hours that would have triggered FLSA overtime if the FLSA were the only applicable rule.

Tip-specific mechanics

Cash tips, service charges, and digital assets

The cash-tips definition controls. Three categories the final regulations treat carefully.

What's in (cash tips):

• Cash and check — physical currency and paper check.
• Credit and debit cards — including through the payment terminal at checkout.
• Gift cards — when used to tip.
• Electronic settlement and mobile payment apps denominated in cash — Venmo, PayPal, Cash App, Zelle, when the underlying unit is U.S. dollars.
• Tangible or intangible tokens readily exchangeable for a fixed amount in cash — casino chips (named example in the regulations).
• Tip-pool and tip-share receipts — explicit under § 224(c)(2): "tips received under any tip-sharing arrangement."

What's out (service charges): Service charges, automatic gratuities, mandatory tip lines, "kitchen appreciation fees," and "wellness surcharges" are wages, not tips. IRS Fact Sheet FS-2015-08, Rev. Rul. 2012-18, and T.D. 10044 confirm. A service charge that is later distributed to a worker is wages — subject to income tax and FICA the same as any other wage — and cannot be deducted under § 224.

What's out (digital assets): T.D. 10044 expressly excludes "most digital assets" from the cash-tips definition. The "denominated in cash" qualifier is the load-bearing test. Workers tipped in Bitcoin, NFTs, or in-game tokens cannot claim § 224 on those amounts. Stablecoins pegged 1:1 to USD sit ambiguously; the conservative posture is to treat all digital-asset tips as outside § 224 until Treasury issues clarifying guidance.

Tip pools and § 6053 worker reporting

26 USC § 6053(a) requires a tipped employee to report tips to the employer when those tips total $20 or more in a calendar month. The $20 threshold applies separately to each employer per IRS Publication 5080. Under-$20 months are still subject to Medicare tax but do not trigger the § 6053(a) reporting duty and do not pass through a § 6051(a)(18) statement — they are therefore not deductible under § 224(a) unless reported on Form 4137.

26 USC § 6053(c) imposes the 8% allocated-tip rule on large food and beverage establishments. When employee-reported tips fall below 8% of gross receipts, the difference is allocated to tipped employees and reported in Box 8 of the W-2. Allocated tips count toward § 224 if the worker's occupation qualifies.

Mandatory tip pools under 29 CFR § 531.54 that include kitchen and other back-of-house staff (permitted under the FLSA after the 2018 amendments at 29 USC § 203(m)(2)(A)) must track tip-pool allocation by participant. The qualifying-occupation worker's share is deductible under § 224; the non-qualifying worker's share is not.

FLSA § 3(m) tip credit interaction

29 USC § 203(m) permits an employer to pay tipped employees a direct cash wage of $2.13/hour. The employer takes a $5.12/hour tip credit against the federal minimum wage of $7.25/hour under 29 USC § 206(a)(1). The credit is available only when the employee's tips bring total compensation to at least $7.25/hour for each hour worked. The implementing regulations are at 29 CFR Part 531, Subpart D.

State law overrides in seven states: California (Labor Code § 351), Nevada (NRS § 608.160), Oregon (ORS § 653.035), Washington (RCW § 49.46.020), Alaska (AS 23.10.065), Minnesota (Minn. Stat. § 177.24), and Montana (MCA § 39-3-409) prohibit the tip credit entirely.

§ 3(m) × § 224 interaction. They are independent. § 224 applies whether or not the employer claims a tip credit. The worker's Box 12 code TP figure (total cash tips reported to employer) is the same data the employer needs for § 3(m) tip-credit compliance — the reporting burden is therefore lower than it appears.

Restaurant Law Center v. DOL — 5th Circuit vacatur

Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (5th Cir. Aug. 23, 2024), vacated the DOL's December 2021 final rule — the 80/20/30 Tip Credit Rule — on a nationwide basis. The Fifth Circuit held the rule "contrary to the FLSA's clear statutory text" and "arbitrary and capricious" applying the post-Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), standard of review.

The vacated rule had limited how much time a tipped employee could spend on "non-tipped" duties while the employer claimed the tip credit (80% tip-producing, 20% directly-supporting non-tipped, 30 continuous minutes ceiling). Post-vacatur, the DOL has not issued a new rule; the pre-2021 framework applies: tip credit available when the worker is "engaged in a tipped occupation," without mechanical 80/20/30 limits. The DOL did not seek Supreme Court review.

State conformity — the structural taxonomy

State income-tax conformity to §§ 224/225 depends on three independent variables: the starting point for state taxable income, the conformity model, and any statute that specifically addresses the OBBB deductions.

Three starting-point postures

Per the Tax Policy Center briefing book on state conformity, the 41 states with broad-based individual income tax fall into three patterns:

The remaining 9 states have no individual income tax on wages: Alaska, Florida, Nevada, New Hampshire (interest/dividends tax phased out post-2024), South Dakota, Tennessee, Texas, Washington (2022 capital-gains-only excise), and Wyoming.

The starting-point question is load-bearing. §§ 224/225 reduce line 15 (federal taxable income); a state that imports line 11b (AGI) never imports a number that has been reduced by either deduction, regardless of conformity model.

Two conformity models

• Rolling conformity — the state automatically incorporates IRC changes as Congress enacts them. To opt out of a specific provision, the legislature must pass a decoupling statute. Most states use this model.
• Static (fixed-date) conformity — the state adopts the IRC as of a specific date. To pick up a new IRC change, the legislature must affirmatively advance the conformity date past the federal enactment. Roughly one-third of states use this model.

Static conformity is itself a decoupling-by-default mechanism for any IRC change enacted after the state's date. California's SB 711 sets the date at January 1, 2025 — six months before OBBB — so OBBB is structurally outside California's tax base. Virginia's HB 29 sets the date at December 31, 2025 — after OBBB — so OBBB is structurally inside Virginia's static-conformity window unless separately decoupled.

The four practical buckets

Bucket 3 contains Idaho, North Dakota, Oregon, and South Carolina (passthrough states) plus Colorado (the one FTI-starting state that decoupled — from § 225 only). Bucket 4 is structurally empty for §§ 224/225 as of May 2026 — no FTI-starting state operates on a fixed-date model that excludes OBBB.

Colorado — the § 224 / § 225 divergence

Colorado is the most consequential single state for OBBB-deduction conformity, and the only state where § 224 and § 225 receive different state-tax treatment.

HB 25-1296 — decoupling from § 225 only

Colorado is rolling-conformity and FTI-starting. Absent action, both §§ 224 and 225 would have reduced Colorado state taxable income. The legislature acted before OBBB was enacted.

Bill: HB 25-1296. Signed by Governor Jared Polis on May 16, 2025 — seven weeks before OBBB's enactment on July 4, 2025. Section 6 amends Colorado Revised Statutes § 39-22-104 to require:

"the amount of any overtime compensation excluded or deducted from a taxpayer's federal gross income"

be added back to federal taxable income for purposes of computing Colorado state taxable income. Effective tax year 2026. The Colorado Department of Revenue's DR 0104 booklet for tax year 2026 adds a line labeled "Excess federal deduction for overtime pay" for the add-back computation.

The asymmetric divergence. HB 25-1296 references only "overtime compensation." It does not add back the § 224 tips deduction. Federal § 224 therefore passes through to Colorado taxable income; federal § 225 does not. The Colorado posture for a worker who receives both tip and overtime income:

• ✗ no state-level § 225 OT deduction (decoupled by HB 25-1296)
• ✓ state-level § 224 tips deduction available (passthrough at Colorado's 4.4% flat rate)

The Institute on Taxation and Economic Policy estimated approximately $90M annual revenue loss from Colorado's § 224 passthrough — versus the $119M loss that HB 25-1296 prevented on the § 225 side.

Pending TABOR challenge

A constitutional challenge to HB 25-1296 was filed in Denver District Court on July 24, 2025 by Advance Colorado on behalf of named individual plaintiffs (including former state senator and El Paso County overtime-eligible workers). The plaintiffs argue HB 25-1296 effectively imposes a new tax without voter approval, which the Taxpayer's Bill of Rights at Colorado Constitution Article X, § 20 prohibits without an election.

The case is pending in Denver District Court as of May 2026. HB 25-1296 remains in effect pending resolution. If TABOR plaintiffs prevail, the add-back could be enjoined and Colorado would revert to the default FTI-starting passthrough for § 225 as well.

California — non-conformity to both (SB 711)

Primary source: SB 711 official bill page. Signed by Governor Gavin Newsom on October 1, 2025; chaptered as Chapter 231 of 2025 Statutes.

Statutory text — California Revenue and Taxation Code § 17024.5(a)(1)(Q):

"For taxable years beginning on or after January 1, 2025 ........ January 1, 2025."

That single subdivision sets California's IRC conformity date to January 1, 2025 — six months before OBBB's July 4, 2025 enactment. OBBB is therefore structurally outside California's tax base.

FTB administrative confirmation. The California Franchise Tax Board, Tax News, November 2025:

"The changes made to federal law by this provision were added after January 1, 2025. As a result, California does not conform to the deduction for the overtime paid."

The FTB Tax News, March 2026 issue reaffirms — and applies the same logic to § 224.

Fiscal scoring. California's Legislative Analyst's Office projects approximately $3.2 billion annual revenue protection from non-conformity to OBBBA § 224 and § 225 combined — the largest single-state fiscal impact in the country. FTB has not published a disaggregated split between OT and tips.

California-specific overtime gap. Even at the federal level, California-based hourly workers see the lowest combined benefit nationally. California daily 8-hour overtime, double-time, and 7th-day premiums under Labor Code § 510 don't qualify federally under § 225(c)(1) regardless of state conformity.

Other AGI-starting non-conformers

These six jurisdictions are AGI-starting structurally, so §§ 224/225 have no automatic pathway into their tax base regardless. The non-conformity statements codify what the structural posture already implies.

New York — IT-225 add-backs and SB S587-A divergence

Mechanism. NY DTF has added two codes to IT-225 for tax year 2026: "Add-back of exempt overtime pay" and "Add-back of exempt tip income." Taxpayers who claim §§ 224/225 federally report the federally-deducted amounts as addition modifications on IT-225 and attach IT-225 to IT-201 (resident) or IT-203 (non-resident).

Pending state-level tip exemption — SB S587-A. Introduced January 8, 2026 by Governor Kathy Hochul, would amend NY Tax Law § 612 to allow taxpayers to deduct up to $25,000 of cash and credit-card tips received during the tax year. The bill targets tips only — there is no state-level overtime exemption in the package. As of late March 2026, SB S587-A is pending before the Senate Committee on Budget and Revenue; both chambers have indicated backing. NYC alone is projected to lose approximately $239M annually in tax revenue if the bill enacts.

The New York posture if SB S587-A enacts:

• ✗ federal § 225 OT still added back (no state-level OT relief)
• ✗ federal § 224 still added back, BUT
• ✓ separate state-level tip exemption available (parallel state-level relief)

Illinois — administrative non-conformity for both

The Illinois Department of Revenue requires add-back of both federal § 224 and federal § 225 deductions on the IL-1040. No specific 35 ILCS section directly addresses the OBBB deductions; the decoupling is administrative through IDOR guidance. Estimated combined revenue protection: approximately $267M annually.

Practical implementation. Employers must implement dual-track reporting for 2026: federal taxable income with the OBBB deductions applied; Illinois state taxable income with the deductions added back. Payroll systems that compute Illinois withholding from federal taxable income need configuration audits to avoid mid-year under-withholding.

Maine — declined conformity to both (Governor's Determination + LD 2010)

Statutory authority for the Determination. Maine P.L. 2025, c. 336, effective September 23, 2025, grants the Governor authority to direct the State Tax Assessor on temporary conformity matters without going back to the Legislature.

Determination text. Governor Janet Mills's Determination and Direction to the State Tax Assessor (October 1, 2025), summarized in the Pierce Atwood alert. Mills adopted DAFS recommendations to conform to limited OBBBA provisions (§ 179 expensing, certain R&D deductions) and explicitly declined to conform to "No tax on tips" and "No tax on overtime."

LD 2010 (introduced January 2026 in the 132nd Legislature, 2nd Regular Session): Mills's permanent-statute conformity bill, conforms to selected OBBB provisions (standard deduction, charitable contributions) but expressly declines to conform to §§ 224 or 225. Mills cited approximately $27.8M projected cost to conform to § 225 OT; the tip-side projection is in the same range.

Maine Form 1040ME begins from federal AGI on line 14. The no-passthrough outcome is structurally guaranteed regardless of LD 2010's fate.

Hawaii — fixed-date freeze pre-OBBB

Hawaii froze its IRC conformity date in late 2024, before OBBBA's enactment. Hawaii has not advanced its conformity date past OBBB; the Hawaii Department of Taxation has not issued §§ 224/225-specific guidance as of May 2026.

Other fixed-date pre-OBBB-freezing states (per Tax Foundation): Arizona, Georgia, Idaho, Kentucky, South Carolina, South Dakota, West Virginia. These are states whose conformity-date posture inherently excludes OBBB from their tax base, regardless of any provision-specific legislation.

Connecticut — signaled non-conformity

Per the Thomson Reuters Checkpoint state-decoupling tracker, Connecticut has indicated it will not conform to the OBBBA tips or overtime deductions. The Connecticut Department of Revenue Services has not yet issued primary guidance specific to §§ 224/225.

District of Columbia — Temporary Conformity Act + Congressional disapproval

DC Council action. Council Chairman Phil Mendelson introduced the Temporary Conformity Act on November 3, 2025; the DC Council passed it via emergency procedure on November 4, 2025. The Act decouples DC from OBBBA tips, overtime, car-loan-interest, and the senior deduction.

Fiscal scoring. DC CFO Glen Lee estimated approximately $100M FY2026 revenue gain from decoupling.

Congressional disapproval (H.J. Res. 142): House passed February 4, 2026; Senate passed 49-47 February 12, 2026; Presidential signature February 18, 2026.

DC AG opinion. Attorney General Brian Schwalb issued a formal legal opinion on February 24, 2026 concluding that the Congressional disapproval resolution does not alter District taxpayers' 2025 tax liabilities and that the Temporary Conformity Act remains in effect. The position is contested as of May 2026.

AGI-starting states with state-level OBBB-equivalent provisions

Arizona — Executive Order 2025-15

Two Arizona conformity bills (SB 1106 and SB 1638) were vetoed by Governor Katie Hobbs in early 2025. Posture reversed on November 25, 2025 with Executive Order 2025-15, directing the Arizona Department of Revenue to integrate five OBBBA provisions into Arizona Form 140 for tax year 2025: higher OBBBA basic standard deduction, the $6,000 senior deduction, the § 224 tip income deduction, the § 225 overtime deduction, and the § 226 auto-loan-interest deduction.

Legal posture. No Arizona statute enacts these conformity changes. The EO is the legal basis. Practitioners flag the risk that an EO could be challenged or revoked.

Worker math at Arizona's 2.5% flat rate. A $6,500 § 225 deduction at 2.5% yields ~$163 state-level tax savings. Combined federal + Arizona benefit at the 22% federal bracket: ~$1,430 + ~$163 = ~$1,593.

Georgia — HB 463 + HB 1199 ($1,750 state-level exclusions)

Georgia enacted two relevant bills in 2026:

• HB 1199 — conformity-update bill, advances Georgia's IRC conformity date to January 1, 2026 (after OBBB's July 4, 2025 enactment) with explicit decoupling from §§ 224 and 225.
• HB 463 — the "Georgia Economic Growth and Tax Relief Act of 2026" — signed by Governor Brian Kemp on May 11, 2026. Lowers Georgia's flat income tax rate to 4.99%. Creates state-level overtime and tip exclusions capped at $1,750 each for tax years 2026-2028.

Worker math at Georgia's 4.99% flat rate. State-level cap is $1,750 per category. A worker with $6,500 of qualifying overtime: federal savings ~$1,430 + Georgia state savings on $1,750 × 4.99% = ~$87. Combined ~$1,517.

Georgia is the clearest example of an AGI-starting state with a designed-from-scratch smaller state-level OBBB-equivalent. Other state legislatures (MD, WI) are evaluating similar provisions through 2026-2027 sessions.

The FTI-starting passthrough states

These four FTI-starting states have not enacted statutes specifically addressing the OBBB deductions as of May 2026. The federal deductions reduce state taxable income by default.

Oregon — affirmative retention via SB 1507

Oregon is rolling-conformity and FTI-starting. The 2026 Oregon Legislative Assembly enacted SB 1507, signed by Governor Tina Kotek on April 9, 2026. SB 1507 selectively disconnects from OBBBA corporate-side provisions (R&D expensing under § 174, business interest under § 163(j), opportunity zones under § 1400Z, qualified production property under § 168(n)) and from the OBBBA auto-loan-interest deduction under § 226, but affirmatively retains the passthrough of § 224 (tips) and § 225 (overtime).

The Oregon Legislative Revenue Office projected net state revenue savings of approximately $300M across the 2025-2027 biennium from the selective disconnect — the corporate-side decoupling more than offsets the worker-side passthrough. ITEP projects approximately $204M annual passthrough cost from retaining § 225.

Idaho — HB 559 conforms

Idaho is rolling-conformity and FTI-starting. HB 559 (signed by Governor Little March 3, 2026) conforms Idaho to OBBB including §§ 224 and 225. The Tax Foundation estimates $167.4M in annual Idaho revenue impact for tax year 2026; the Idaho Center for Fiscal Policy estimates $284.4M in aggregate annual loss across all OBBB conformity.

North Dakota — passive passthrough

North Dakota is rolling-conformity and FTI-starting. No decoupling enacted as of May 2026. ITEP projects approximately $29M annual § 225 passthrough — the smallest of the four passthrough states by fiscal magnitude. Per-worker impact is modest given North Dakota's relatively flat marginal rate structure (top rate 2.5%).

South Carolina — contested posture, largest fiscal magnitude

South Carolina is rolling-conformity and FTI-starting. The SCDOR has not conformed; the federal deductions are added back to state taxable income for tax year 2025. H 3368 (the conformity bill, projected ~$534.1M in FY 2026-27 revenue loss if enacted) and H 4216 (a more aggressive bill that would phase out the state income tax entirely; ITEP projects ~$309M initial impact) are both pending. ITEP projects approximately $521M annual passthrough — the largest single-state fiscal impact among the four FTI states. The SC posture is the most volatile of any state covered.

AGI-starting states that decoupled from OBBB generally (not from §§ 224/225)

The press coverage of these states often frames them as OBBB-deduction decouplers; they aren't. §§ 224/225 have no state effect anyway because both states are AGI-starting.

Massachusetts — HB 4975 (pending)

Governor Maura Healey introduced HB 4975 on January 15, 2026. The bill addresses IRC §§ 174A (R&E deductions), 163(j) (business interest), 168(n) (qualified production property), 179(b) (small-business expensing), and 1400Z (opportunity zones). The bill does not address §§ 224 or 225. Massachusetts Comptroller projected approximately $664M aggregate revenue cost if all OBBBA provisions flowed through.

Massachusetts is AGI-starting; §§ 224/225 have no automatic passthrough regardless of HB 4975's fate.

Virginia — HB 29 (Chapter 7 of 2026 Acts)

HB 29 is Chapter 7 of the 2026 Acts of Assembly, signed by Governor Abigail Spanberger on February 20, 2026. Sets Virginia's static conformity date to December 31, 2025. The bill specifically decouples from IRC §§ 168(k), 168(n), 174 / 174A, and 163(j). HB 29 does not address §§ 224 or 225.

Virginia generated approximately $200.3M in increased general-fund revenues for FY2026 from the corporate-side decoupling. Form 760 line 1 imports federal AGI; §§ 224/225 have no automatic passthrough regardless of HB 29's scope.

State-by-state table

The table summarizes state treatment of federal §§ 224 (tips) and 225 (overtime) for tax year 2026.

Industry-specific scope

Tipped industries (§ 224)

The dominant § 224 industries:

• Food and beverage — Wait staff (TTOC 102), bartenders (TTOC 101), bussers, hosts/hostesses, food runners, sommeliers, baristas all qualify. The interaction with the FLSA tip credit at 29 USC § 203(m) is the operational complexity.
• Hospitality — Bellhops, concierges, valets, hotel housekeepers, doormen qualify. Hotel banquet workers receive a mix of tip income (qualifying) and service-charge income on banquet contracts (wages, not tips, not § 224-eligible).
• Beauty and personal care — Hairdressers, barbers, hairstylists, and cosmetologists qualify under TTOC 603. Booth renters and independent-contractor stylists who receive tips report on 1099-NEC or 1099-MISC under § 6041 / § 6041A.
• Casino dealers and gaming — Qualify. The "casino chips" example in T.D. 10044's cash-tips definition exists because gaming-industry tipping commonly happens in chips. Chip-to-cash tip income converts at face value at the time of receipt.
• Transportation and rideshare — Taxi drivers, rideshare drivers (Uber, Lyft), limo drivers, shuttle drivers, and tour guides qualify. Most rideshare drivers receive 1099-K from the platform under § 6050W; § 6050W(f)(2) is one of the § 224(a) reporting paths.
• Recreation and entertainment — Golf caddies, ski instructors, fishing guides, musicians (live venue), DJs, and certain performers qualify.

Overtime-relevant industries (§ 225)

The §§ 224/225 industry intersections diverge. § 225's scope is set by FLSA § 7 — not by occupation. The industry-specific exclusions discussed above (healthcare 8-and-80, fire and police § 207(k), trucking MCA exemption, agricultural § 213(b)(12), Davis-Bacon prevailing wage) define which premiums qualify.

A worker performing in a § 224 tipped occupation who also works FLSA overtime hours can claim both deductions: § 224 on the cash tips, § 225 on the 0.5× premium portion of the overtime check. The deductions are independent caps.

Multi-state and remote workers

The governing principle for both §§ 224/225 is the worker's federal return, not work location. Federal deductions apply regardless of work state. State-conformity follows the worker's state of residence and the work-location rules of each state's income-tax regime.

Three scenarios

Scenario 1 — Oregon resident, Washington work. A worker resident in Oregon performing both qualifying tip work and FLSA-overtime work in Washington (no income tax) recovers the federal §§ 224/225 deductions on the federal 1040, then carries the post-deduction federal taxable-income number into the Oregon Form OR-40 starting point under SB 1507 — getting the Oregon state-level reduction as well. Result: federal + Oregon double-savings on both deductions.

Scenario 2 — California resident, Texas work. A worker resident in California performing tip work and FLSA-overtime work in Texas claims the federal §§ 224/225 deductions on the 1040; California's Form 540 starts from federal AGI (line 11b), which is not reduced by either deduction. The worker pays California state tax on the full tip and overtime amounts plus the federal deductions. Result: federal savings only.

Scenario 3 — Multi-state remote worker. A worker who splits work across an FTI-starting state (Idaho passthrough) and an AGI-starting state (California non-conformity) files non-resident returns in both. The Idaho non-resident return imports the post-deduction federal taxable-income number for the Idaho-apportioned share; the California non-resident return imports federal AGI for the California-apportioned share.

Implication for employer payroll. Box 12 codes TP and TT reporting are identical in all 50 states — the qualified tip total and FLSA-premium amount, populated for every applicable employee. State withholding configurations need separate review: AGI-starting states need no special treatment; FTI-starting passthrough states need the post-deduction number for withholding; Colorado specifically needs the § 225 add-back line populated.

Worked examples

Maya — Texas server, § 224 only

Maya is a server at a casual-dining restaurant in Texas. She earns $2.13/hour cash wage (federal tip credit available), works 40 hours/week × 50 weeks = 2,000 hours/year. Her total cash tips for tax year 2026:

• Customer tips paid via credit card: $15,000
• Customer tips paid in cash: $3,000
• Tip-pool share from food runners and bussers: $2,000
• Total cash tips: $20,000

What the employer reports on Maya's 2026 W-2:

• Box 1 (Wages): $20,000 cash tips + $4,260 cash wage = $24,260
• Box 12 code TP: $20,000 (qualified cash tips)
• Box 14b: TTOC 102 (Wait Staff)
• FICA wages (Box 3 + Box 5): $24,260 — FICA applies to the full amount

What Maya claims on her 2026 Form 1040 (using OBBB's tax-year-2026 $16,100 single standard deduction and the 10% bracket ceiling of $12,400):

• AGI (line 11b): $24,260
• Schedule 1-A line 1 (§ 224): $20,000
• Pre-§ 224 federal taxable income: $24,260 − $16,100 = $8,160 (within 10% bracket)
• Pre-§ 224 federal tax owed: $8,160 × 10% = $816
• Post-§ 224 federal taxable income: $24,260 − $16,100 − $20,000 = −$11,840, capped at $0
• Post-§ 224 federal tax owed: $0
• Maya's federal tax savings from § 224: $816

State overlay. Texas has no state income tax — Maya's combined savings is $816. A Maya in California (SB 711 non-conformity) receives the same $816 federal and pays California state tax on the full $20,000. A Maya in Colorado receives the $816 federal plus state-level relief — Colorado conforms to § 224 (HB 25-1296 added back § 225 only). At Colorado's 4.4% flat rate, the state savings on $20,000 equals roughly $880. Total Colorado-side benefit: approximately $1,696.

Maria — $25/hour, 520 FLSA-overtime hours/year, § 225 only

Maria works 40 hours straight-time + 10 hours overtime per week × 52 weeks = 520 OT hours per year.

Federal computation:

• Regular rate: $25/hour
• FLSA premium per OT hour: $25 × 0.5 = $12.50
• Total FLSA premium: $12.50 × 520 = $6,500
• Federal deduction under § 225(a): $6,500 (well under the $12,500 single cap)
• Federal tax savings at 22% bracket: $6,500 × 0.22 = ~$1,430

California overlay (Maria-in-CA):

• California Form 540 starts from federal AGI (line 11b), which doesn't include § 225
• Maria's California taxable income doesn't benefit from § 225
• California tax on the $6,500 of overtime premium at 9.3% marginal: ~$605
• Net Maria-in-CA: $1,430 − $605 = ~$825 combined benefit

The California math also assumes Maria's other California overtime premiums (daily 8h, 7th-day, daily double-time under Labor Code § 510) don't qualify under § 225(c)(1) — they don't, because they're not § 207-required.

Oregon overlay (Maria-in-OR):

• Oregon Form OR-40 imports federal taxable income post-§ 225 (SB 1507 retained)
• Oregon tax savings on the $6,500 reduction at Oregon's ~9.9% top bracket: ~$644
• Net Maria-in-OR: $1,430 + $644 = ~$2,074 combined benefit (~2.5× the California outcome)

Virginia overlay — the structural-AGI walkthrough:

• Form 1040 line 11b = federal AGI (without § 225 reduction)
• Form 1040 Schedule 1-A § 225 amount = $6,500
• Form 1040 line 13b = $6,500 (from Schedule 1-A)
• Form 1040 line 15 = federal AGI − standard deduction − $6,500
• VA Form 760 line 1 = federal AGI (line 11b of 1040) — NOT line 15
• VA never imports the post-§ 225 number

HB 29's decouplings from § 168(k) / § 168(n) / § 174 / § 174A / § 163(j) are relevant because those provisions affect federal AGI. § 225 is below-AGI, so it doesn't appear in Virginia's import even with full conformity.

Recent changes (last 18 months)

• Late 2024 / early 2025 — Fixed-date conformity states (AZ, GA, HI, ID, KY, SC, SD, WV) pre-emptively decouple by freezing IRC conformity dates before OBBBA's enactment.
• May 16, 2025 — Colorado HB 25-1296 signed by Governor Polis; the only legislative action to block § 225 passthrough (preemptive); does not address § 224.
• July 4, 2025 — OBBB signed; IRC §§ 224 and 225 enacted via § 70401, P.L. 119-21.
• July 24, 2025 — Advance Colorado v. Polis filed in Denver District Court; TABOR challenge to HB 25-1296.
• August 27, 2025 — Treasury Department publishes the preliminary list of qualifying tipped occupations.
• September 22, 2025 — Proposed § 224 regulations published at REG-110032-25 (90 Fed. Reg. 45624).
• September 23, 2025 — Maine P.L. 2025, c. 336 effective; authorizes Governor's Determinations on temporary conformity.
• October 1, 2025 — California SB 711 signed (Ch 231 of 2025); same day Governor Mills's Determination declines OBBBA § 224 / § 225 conformity for Maine.
• November 3-4, 2025 — DC Council introduces and passes Temporary Conformity Act (emergency procedure).
• November 21, 2025 — IRS Notice 2025-69 (federal 2025 transition relief).
• November 25, 2025 — Arizona Executive Order 2025-15 directs ADOR to add OBBB deductions to Form 140.
• January 8, 2026 — New York SB S587-A introduced; would create state-level tip exemption up to $25,000.
• January 12, 2026 — IRS finalizes 2026 Form W-2 with Box 12 codes TP and TT.
• January 15, 2026 — Massachusetts Gov Healey introduces HB 4975 (corporate-side OBBBA delay; does not address §§ 224/225).
• February 4-12-18, 2026 — Congressional disapproval of DC Temporary Conformity Act (H.J. Res. 142): House, Senate 49-47, Presidential signature.
• February 20, 2026 — Virginia HB 29 signed (Ch 7 of 2026 Acts); decouples from §§ 168(k), 168(n), 174 / 174A, 163(j); does not address §§ 224/225.
• February 24, 2026 — DC AG Schwalb issues formal opinion preserving Temporary Conformity Act for 2025 tax year.
• March 2026 — California FTB Tax News reaffirms non-conformity to OBBBA § 224 / § 225.
• March 3, 2026 — Idaho HB 559 signed; Idaho conforms to OBBB including §§ 224 and 225.
• April 9, 2026 — Oregon SB 1507 signed by Governor Kotek; selectively disconnects from OBBBA corporate provisions and § 226, but RETAINS § 224 / § 225 passthrough.
• April 13, 2026 — T.D. 10044 published at 91 Fed. Reg. 19026, enumerating § 224 qualifying occupations and defining cash tips (effective June 12, 2026).
• May 11, 2026 — Georgia HB 463 signed by Governor Kemp; creates state-level $1,750 overtime and tip exclusions; HB 1199 advances Georgia's IRC conformity date with explicit § 224 / § 225 decoupling.

The 5th Circuit's August 23, 2024 vacatur of the 80/20/30 tip-credit rule in Restaurant Law Center v. DOL predates the 18-month window but remains the controlling framework for the FLSA tip-credit context that § 224 reporting runs underneath.

FAQ

Does "no tax on tips and overtime" mean no tax on tips and overtime?

No. §§ 224 and 225 are federal income-tax deductions, not wage exclusions. Federal income tax up to the deduction amount is eliminated at filing time. FICA (Social Security and Medicare, 7.65% each from employer and employee) applies on every dollar of tip income and overtime premium under 26 USC §§ 3101 and 3111. State income tax usually applies. Federal income-tax withholding is unchanged. The deductions are claimed on the worker's Form 1040 at filing time on Schedule 1-A.

Does the federal § 225 deduction reduce state taxable income in my state?

In 4 states yes: Oregon (affirmatively retained via SB 1507), Idaho (HB 559 conforms), North Dakota, and South Carolina (subject to contested SCDOR add-back). In 1 state structurally yes but blocked by statute: Colorado (HB 25-1296 add-back). In 46 jurisdictions no: the deduction never touches the state base because state taxable income starts from federal AGI (31 states + DC), is computed from own income classes (5 states), or there's no income tax at all (9 states).

Does the federal § 224 deduction reduce state taxable income in my state?

In 5 states yes by default: Colorado, Idaho (HB 559), North Dakota, Oregon (SB 1507), and South Carolina (subject to contested SCDOR add-back). Colorado specifically passes § 224 through even though it decoupled from § 225 — HB 25-1296 names only "overtime compensation." Arizona allows it administratively under EO 2025-15; Georgia provides a separate $1,750 state-level exclusion under HB 463. New York is pursuing SB S587-A for a separate state-level tip exemption. California, Maine, Illinois, and DC add the deduction back via various mechanisms.

Why isn't this just "rolling conformity" vs "static conformity"?

Because conformity model is downstream of starting point. A rolling-conformity AGI-starting state (most states) automatically imports IRC changes — but §§ 224/225 reduce federal taxable income, not federal AGI, so there's no IRC change for the rolling-conformity import to pick up. The starting-point question is dispositive; conformity model is the second-order detail.

What occupations qualify for the § 224 deduction?

Approximately 70 occupations enumerated in T.D. 10044 (Apr. 13, 2026) under three-digit Treasury Tipped Occupation Codes (TTOCs). The occupation must have "customarily and regularly received tips on or before December 31, 2024" under § 224(c)(1). Major categories: food service (bartenders TTOC 101, wait staff TTOC 102), hospitality (bellhops, concierges, hotel housekeepers), beauty and personal care (hairdressers TTOC 603), transportation (taxi, rideshare, tour guides), casino dealers, and various recreation/entertainment workers.

Are service charges and automatic gratuities deductible under § 224?

No. Service charges and automatic gratuities are wages under Rev. Rul. 2012-18 and T.D. 10044. They are not "tips" within the meaning of § 224(c)(1). The 18% added to a party of eight, the "kitchen appreciation fee" line item, and mandatory banquet gratuities are all service charges. Including them in Box 12 code TP is a § 6721 information-return violation.

Are cryptocurrency or NFT tips eligible for § 224?

No. T.D. 10044 expressly excludes "most digital assets" from the definition of cash tips. The "denominated in cash" qualifier is the load-bearing test. Stablecoins pegged 1:1 to USD sit ambiguously; the conservative posture is to treat all digital-asset tips as outside § 224 until Treasury issues clarifying guidance.

Does California daily 8-hour overtime qualify for the federal § 225 deduction?

No. § 225(c)(1) restricts qualifying overtime to "overtime compensation paid to an individual required under section 7 of the Fair Labor Standards Act." Section 7 of the FLSA requires weekly-over-40 overtime only. California's daily 8-hour overtime, daily double-time, and 7th-consecutive-day premium under Labor Code § 510 are state-law obligations, not § 7-required, so they don't qualify federally.

Does Box 12 code TT get reported on every W-2 regardless of state?

Yes. Box 12 codes TP (tips) and TT (overtime) are federal information-return requirements under IRC § 6051(a)(18) and (19), required for every applicable employee on every 2026 W-2 regardless of work state. The penalty for incorrect or omitted Box 12 reporting is $310 per W-2 under § 6721, capped at $3.78M per employer per calendar year (2026 figures).

When do these deductions expire?

§ 224(d) and § 225(g) both sunset for tax years beginning after December 31, 2028. Four available tax years: 2025, 2026, 2027, 2028. Absent congressional extension, both deductions disappear for tax years beginning January 1, 2029.

Do the deductions reduce employer-side payroll taxes (FICA, FUTA, state UI)?

No. §§ 224/225 are individual-side income-tax deductions only. Employer-side payroll taxes — FICA at 26 USC §§ 3101 / 3111, FUTA at § 3301, and state unemployment insurance — are computed on the full wage base, regardless of the deductions. State income-tax withholding configurations need review in the passthrough states (post-deduction withholding base) and in Colorado (full-wage withholding base with worker-side § 225 add-back); employer payroll taxes are unchanged everywhere.

What is the Advance Colorado v. Polis lawsuit and how does it affect HB 25-1296?

Advance Colorado filed suit in Denver District Court on July 24, 2025 alleging HB 25-1296 violates the Colorado Taxpayer's Bill of Rights at Colorado Constitution Article X, § 20 by imposing a new tax without voter approval. As of May 2026 the case is pending; HB 25-1296 remains in effect pending resolution. If TABOR plaintiffs prevail, the add-back could be enjoined and Colorado would revert to the default FTI-starting passthrough for § 225.

Why does Georgia have both an explicit decoupling AND a smaller state-level exclusion?

The two provisions answer two different questions. HB 1199 advances Georgia's IRC conformity date to January 1, 2026 (after OBBB's enactment) so that other OBBBA provisions Georgia wants flow through; the explicit §§ 224 / 225 decoupling within HB 1199 blocks the federal deductions specifically. HB 463 then creates a separate Georgia-designed $1,750 exclusion for each at the state's flat 4.99% rate.

If you discover you've been doing this wrong

1. Audit Box 12 codes TP and TT for tax year 2026 W-2s. Pull the year's tip-recordkeeping data under 29 CFR § 516.6 and overtime payroll data. Reconcile against Box 12 code TP (qualified tips, excluding service charges) and Box 12 code TT (the 0.5× FLSA premium portion only, excluding state-law daily/double-time premiums). The reconciliation should match each worker's data sources.

2. Verify Box 14b TTOC against the worker's actual duties. Compare each worker's occupation against the T.D. 10044 enumeration. Use "000" for non-qualifying occupations. Multi-occupation workers get up to 2 TTOC codes. § 6721 penalties run $310 per W-2 for incorrect or omitted codes.

3. Issue Form W-2c for material misreporting. If service charges were included in Box 12 code TP, if the full 1.5× overtime was reported in Box 12 code TT instead of the 0.5× premium, or if TTOC codes were wrong, issue corrected W-2s under 26 USC § 6051. Voluntary correction within 30 days reduces the per-W-2 penalty to $60.

4. Document the tip-pool allocation methodology. For employers running mandatory tip pools that include both qualifying and non-qualifying occupation participants, retain the allocation methodology under 29 CFR § 516.6. The records survive the Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946), burden-shift in any later wage-and-hour or § 224 substantiation inquiry.

5. Audit state withholding configurations. If your payroll system computes state withholding from line 15 of the federal computation rather than from line 11b (federal AGI), workers in AGI-starting states will be under-withheld for the federal §§ 224/225 amounts. Audit against each state's withholding base: line 11b for the 31 + DC AGI-starting states; line 15 for the four passthrough states; line 11b with Colorado § 225 add-back for Colorado.

6. Reconcile state-conformity treatment. For employers operating in non-conforming states (California, Illinois, Maine, NY for both deductions absent SB S587-A; Colorado for § 225 only), confirm dual-track reporting: federal taxable income with the deduction; state taxable income with the deduction added back. For employers in conforming states (Oregon, Idaho, North Dakota; Colorado for § 224 only; Arizona by EO; Georgia at $1,750 cap), the state-tax base passes the federal deduction through.

7. Filing-season communications. Don't tell workers "your state doesn't tax overtime/tips" without verifying the state's specific posture. The phrase has structurally different meanings in Oregon (federal passthrough reduces state tax) vs Colorado (federal § 225 deduction works on 1040 but state adds back; § 224 passes through) vs California (federal deductions work on 1040; state taxes full overtime and tip income). Anchor every employee communication to the specific state's posture.

The bottom line

The state-by-state landscape for §§ 224 and 225 collapses to a single structural question: does the state's tax base start from federal AGI (line 11b) or federal taxable income (line 15)? Forty-six jurisdictions start from AGI or use their own base or have no income tax — neither deduction has any automatic state-level effect. Five states start from federal taxable income; four pass both deductions through; Colorado uniquely passes § 224 through while statutorily blocking § 225. All other categorical labels — "rolling vs static conformity," "explicit non-conformity statement," "decoupled from OBBBA generally" — are downstream of that single question.

The structural failure modes recur. Service charges reported as tips, digital-asset tips treated as cash, state daily overtime treated as § 225-qualifying, the full 1.5× overtime reported in Box 12 code TT, non-qualifying occupations coded with qualifying TTOCs, and the assumption that federal §§ 224/225 reduce state taxable income — each is a § 6721 information-return violation or a misclaimed deduction waiting for an IRS deficiency notice. Colorado's asymmetric § 224-passes-through / § 225-decoupled posture and New York's pending SB S587-A state-level tip exemption complicate the assumption that the two deductions travel together.

The highest-leverage operational discipline is tip-recordkeeping that supports both 29 CFR § 516.6 (FLSA tip-credit substantiation) and 26 USC § 6053 (worker-side tip reporting), plus FLSA-§ 7-anchored overtime tracking that distinguishes federal-floor premium from state-law overlay. The 2026 W-2 Box 12 codes TP and TT figures are the same numbers the employer already tracks for § 3(m) tip-credit compliance and FLSA overtime computation; the reporting burden imposed by §§ 224/225 is therefore lower than it appears, provided the underlying records are workweek-anchored, occupation-coded, and exclude service charges and state-law premium overlays.

Sources

Federal — statutes

• 26 USC § 224 — Qualified tips: https://www.law.cornell.edu/uscode/text/26/224
• 26 USC § 225 — Qualified overtime: https://www.law.cornell.edu/uscode/text/26/225
• 26 USC § 3101 — FICA tax on employees: https://www.law.cornell.edu/uscode/text/26/3101
• 26 USC § 3111 — FICA tax on employers: https://www.law.cornell.edu/uscode/text/26/3111
• 26 USC § 3301 — FUTA: https://www.law.cornell.edu/uscode/text/26/3301
• 26 USC § 6041 — Information at source: https://www.law.cornell.edu/uscode/text/26/6041
• 26 USC § 6041A — Returns regarding payments of remuneration: https://www.law.cornell.edu/uscode/text/26/6041A
• 26 USC § 6050W — 1099-K reporting: https://www.law.cornell.edu/uscode/text/26/6050W
• 26 USC § 6051 — Receipts for employees: https://www.law.cornell.edu/uscode/text/26/6051
• 26 USC § 6053 — Reporting of tips: https://www.law.cornell.edu/uscode/text/26/6053
• 26 USC § 6721 — Information-return penalties: https://www.law.cornell.edu/uscode/text/26/6721
• 29 USC § 203 — FLSA definitions (incl. § 203(m) tip credit, § 203(t) tipped employee): https://www.law.cornell.edu/uscode/text/29/203
• 29 USC § 206 — Minimum wage: https://www.law.cornell.edu/uscode/text/29/206
• 29 USC § 207 — Overtime (referenced by § 225(c)(1)): https://www.law.cornell.edu/uscode/text/29/207
• 29 USC § 213 — FLSA exemptions: https://www.law.cornell.edu/uscode/text/29/213
• P.L. 119-21 (One Big Beautiful Bill Act): https://www.congress.gov/bill/119th-congress/house-bill/1

Federal — regulations, rulemakings, agency guidance

• T.D. 10044 — Final regulations on § 224, 91 Fed. Reg. 19026 (Apr. 13, 2026): https://www.federalregister.gov/documents/2026/04/13/2026-07104/occupations-that-customarily-and-regularly-received-tips-definition-of-qualified-tips
• REG-110032-25 — Proposed regulations on § 224, 90 Fed. Reg. 45624 (Sept. 22, 2025): https://www.federalregister.gov
• 29 CFR Part 531 Subpart D — FLSA tip credit: https://www.ecfr.gov/current/title-29/subtitle-B/chapter-V/subchapter-A/part-531/subpart-D
• 29 CFR § 531.50 — Tip credit definition: https://www.law.cornell.edu/cfr/text/29/531.50
• 29 CFR § 531.54 — Tip pools: https://www.law.cornell.edu/cfr/text/29/531.54
• 29 CFR § 531.59 — Tip credit calculation: https://www.law.cornell.edu/cfr/text/29/531.59
• 29 CFR § 516.6 — Tip recordkeeping: https://www.law.cornell.edu/cfr/text/29/516.6
• 29 CFR § 553.230 — Public-agency § 207(k) work periods: https://www.law.cornell.edu/cfr/text/29/553.230
• IRS Notice 2025-69 — 2025 transition relief (PDF): https://www.irs.gov/pub/irs-drop/n-25-69.pdf
• IRS Notice 2025-62 — penalty relief (PDF): https://www.irs.gov/pub/irs-drop/n-25-62.pdf
• IRS Fact Sheet FS-2026-04 — Schedule 1-A explainer: https://www.irs.gov/newsroom/schedule-1-a-additional-deductions-what-to-know-about-the-new-form
• IRS § 225 Q&A: https://www.irs.gov/newsroom/questions-and-answers-about-the-new-deduction-for-qualified-overtime-compensation
• IRS — What the "No Tax on Tips" deduction means for you: https://www.irs.gov/newsroom/what-the-no-tax-on-tips-deduction-means-for-you
• IRS — List of qualifying occupations: https://www.irs.gov/forms-pubs/occupations-that-customarily-and-regularly-received-tips-on-or-before-december-31-2024
• IRS 2026 inflation adjustments: https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill
• IRS 2026 General Instructions for Forms W-2 and W-3 (PDF): https://www.irs.gov/pub/irs-pdf/iw2w3.pdf
• IRS Internal Revenue Manual 4.23.7 — Employment Tax on Tip Income: https://www.irs.gov/irm/part4/irm_04-023-007
• IRS Publication 5080 — Tip Recordkeeping Program (PDF): https://www.irs.gov/pub/irs-pdf/p5080.pdf
• IRS Fact Sheet FS-2015-08 — Tips versus service charges (PDF): https://www.irs.gov/pub/irs-news/FS-15-08.pdf
• IRS About Form 4137 (Unreported Tip Income): https://www.irs.gov/forms-pubs/about-form-4137
• Rev. Rul. 2012-18 — Tip-versus-service-charge classification (PDF): https://www.irs.gov/pub/irs-drop/rr-12-18.pdf
• IRS Rev. Proc. 2025-32 / IR-2025-103 — 2026 inflation adjustments: https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill
• Treasury Department Detailed Tipped Occupations List, Aug. 27, 2025 (PDF): https://home.treasury.gov/system/files/136/Tipped-Occupations-Detailed-8-27-2025.pdf
• H.J. Res. 142 (DC Temporary Conformity Act disapproval): https://www.congress.gov/bill/119th-congress/house-joint-resolution/142

DOL guidance

• DOL Fact Sheet #15 — Tipped Employees Under the FLSA: https://www.dol.gov/agencies/whd/fact-sheets/15-tipped-employees-flsa
• DOL — Tip Regulations under the FLSA (Final Rule PDF): https://www.dol.gov/sites/dolgov/files/WHD/flsa/tips_final-rule.pdf
• DOL FAQ — Tip credit: https://www.dol.gov/agencies/whd/flsa/tipsFAQ
• DOL — Minimum Wages for Tipped Employees by State: https://www.dol.gov/agencies/whd/state/minimum-wage/tipped

Case law

• Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (5th Cir. Aug. 23, 2024): https://law.justia.com/cases/federal/appellate-courts/ca5/23-50562/23-50562-2024-08-23.html
• Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680 (1946): https://www.law.cornell.edu/supremecourt/text/328/680
• Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024): https://www.law.cornell.edu/supremecourt/text/22-451

State authorities

• California SB 711 (Chapter 231, 2025 Statutes) — IRC conformity to 1/1/2025: https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202520260SB711
• California Revenue and Taxation Code § 17024.5: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17024.5
• California Labor Code § 510: https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=510.
• California FTB Tax News, November 2025: https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/2025/11.html
• California FTB Tax News, March 2026: https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/2026/03.html
• Colorado HB 25-1296: https://leg.colorado.gov/bills/hb25-1296
• Colorado Revised Statutes § 39-22-104: https://leg.colorado.gov/sites/default/files/images/olls/crs2018-title-39.pdf
• Colorado Constitution Article X, § 20 (TABOR): https://leg.colorado.gov/sites/default/files/images/olls/crs2018-title-cc.pdf
• Colorado DOR DR 0104 booklet (tax year 2025): https://tax.colorado.gov/sites/tax/files/documents/Book104_2025.pdf
• Colorado DOR January 2026 Tax Policy Updates: https://tax.colorado.gov/january-2026-tax-policy-updates
• Idaho HB 559 (2026): https://tax.idaho.gov/pressrelease/update-on-filing-2025-idaho-income-taxes-now-that-conformity-is-law/
• Oregon SB 1507: https://olis.oregonlegislature.gov/liz/2026R1/Measures/Overview/SB1507
• Oregon DOR Form OR-40 instructions: https://www.oregon.gov/dor/forms/Pages/default.aspx
• Georgia HB 463 — Kemp signing announcement: https://gov.georgia.gov/press-releases/2026-05-11/gov-kemp-signs-legislation-lowering-taxes-and-supporting-economic-growth
• Georgia DOR Form 500: https://dor.georgia.gov/individual-income-tax-forms
• Arizona Executive Order 2025-15: https://azgovernor.gov/
• Arizona DOR Form 140: https://azdor.gov/forms/individual
• Arizona EO 2025-15 commentary — FocusHR: https://focushr.net/overtime-tips-w2/
• New York Tax Law: https://www.nysenate.gov/legislation/laws/TAX
• New York DTF Form IT-225 instructions: https://www.tax.ny.gov/forms/current-forms/it/it225i.htm
• New York DTF Form IT-201 instructions: https://www.tax.ny.gov/forms/current-forms/it/it201i.htm
• New York SB S587-A: https://www.nysenate.gov/legislation/bills/2025/S587/amendment/A
• New York Governor Hochul — 2026 Affordability Agenda: https://www.governor.ny.gov/news/money-your-pockets-governor-hochul-kicks-2026-affordability-agenda-new-tax-relief-efforts-and
• Illinois Department of Revenue forms portal: https://tax.illinois.gov/forms/incometax/2024.html
• Illinois — University of Illinois Tax School OBBBA update: https://taxschool.illinois.edu/post/obbba-update-qualified-tips-and-overtime-compensation-for-tax-year-2025/
• Maine P.L. 2025, c. 336: https://legislature.maine.gov
• Maine Revenue Services Form 1040ME: https://www.maine.gov/revenue/sites/maine.gov.revenue/files/inline-files/25_1040me_gen_instr_w_cover_pg.pdf
• Maine Tax Alert October 2025 (PDF): https://www.maine.gov/revenue/sites/maine.gov.revenue/files/inline-files/ta_october2025_vol35_iss14_0.pdf
• Pierce Atwood — Maine OBBBA Determination: https://www.pierceatwood.com/alerts/maine-governor-janet-mills-provides-temporary-obbba-conformity-directions
• Hawaii DOTAX Form N-11: https://files.hawaii.gov/tax/forms/2024/n11ins.pdf
• Connecticut DRS Form CT-1040: https://portal.ct.gov/-/media/DRS/Forms/Individual/2024/CT-1040-Booklet
• Massachusetts EY Tax News alert on HB 4975: https://taxnews.ey.com/news/2026-0326-proposed-massachusetts-bill-would-delay-conformity-to-certain-federal-tax-changes-made-by-the-obbba
• Virginia HB 29 (LIS): https://lis.virginia.gov/cgi-bin/legp604.exe?261+sum+HB29
• Virginia DHRM HR Highlights January 2026 (PDF): https://www.dhrm.virginia.gov/docs/default-source/hr-highlights-newsletter/2026-january-highlights/let-s-get-it-rightflsa-status-overtime-policy-and-obbba.pdf
• Virginia Department of Taxation Form 760: https://www.tax.virginia.gov/forms/search?search=760
• Idaho State Tax Commission: https://tax.idaho.gov/forms/
• North Dakota Office of State Tax Commissioner: https://www.tax.nd.gov/forms
• South Carolina Department of Revenue: https://dor.sc.gov/forms-site/Pages/Form.aspx?BinaryUid=
• South Carolina H 3368 — Fiscal impact statement (PDF): https://www.scstatehouse.gov/sess126_2025-2026/fiscalimpactstatements/H3368%202026-03-10%20amended.pdf

Analysis and trackers (secondary)

• Tax Policy Center briefing book — state income tax conformity: https://taxpolicycenter.org/briefing-book/how-do-state-individual-income-taxes-conform-federal-income-taxes
• Tax Foundation — OBBBA state tax impact: https://taxfoundation.org/research/all/state/big-beautiful-bill-state-tax-impact/
• Tax Foundation — 2026 Tax Brackets: https://taxfoundation.org/data/all/federal/2026-tax-brackets/
• Thomson Reuters Checkpoint — state decoupling tracker: https://tax.thomsonreuters.com/blog/state-decoupling-from-federal-tax-provisions/
• ITEP — Conforming to the No Tax on Tips Gimmick: https://itep.org/conforming-to-the-no-tax-on-tips-gimmick-just-got-riskier-and-costlier-for-states/
• RSM US — Final rules on tips definition: https://rsmus.com/insights/tax-alerts/2026/no-tax-tips-final-rules-confirm-qualifying-occupations-tip-definition.html
• Thomson Reuters Tax — Final Rule on Tips Deduction Released: https://tax.thomsonreuters.com/news/final-rule-on-tips-deduction-released/
• EY Tax News — IRS finalizes § 224 regulations: https://taxnews.ey.com/news/2026-0838-irs-finalizes-regulations-on-irc-section-224-deduction-for-qualified-tip-income
• Current Federal Tax Developments — Technical analysis of T.D. 10044: https://www.currentfederaltaxdevelopments.com/blog/2026/4/10/a-technical-analysis-of-the-final-section-224-regulations-on-the-qualified-tip-deduction
• Littler Mendelson — Fifth Circuit Vacates DOL 80/20/30 Rule: https://www.littler.com/news-analysis/asap/fifth-circuit-vacates-dols-802030-rule-tipped-employees
• Jackson Lewis — Fifth Circuit Strikes Down DOL Tip Credit Rule: https://www.jacksonlewis.com/insights/fifth-circuit-strikes-down-dol-tip-credit-rule-what-it-means-employers
• Littler Mendelson — NY Governor Proposes No Tax on Tips: https://www.littler.com/news-analysis/asap/new-york-governor-proposes-no-tax-tips-legislation
• Forvis Mazars — Virginia tax law update: https://www.forvismazars.us/forsights/2026/03/virginia-updates-tax-law-in-response-to-one-big-beautiful-bill-act
• Baker Tilly — Virginia's budget legislation tax changes: https://www.bakertilly.com/insights/virginias-budget-legislation-includes-multiple-tax-changes
• PayrollOrg — 2026 Form W-2 with OBBBA changes: https://payroll.org/news-resources/news/news-detail/2026/01/12/irs-releases-2026-form-w-2-with-changes-due-to-obbba