Federal return: full deduction
The deduction is federal. A California server, bartender or rideshare driver with tips from a job on the IRS tipped occupations list can deduct up to $25,000 on Schedule 1-A, subject to the same income limit as everyone else.
California return: tips are still taxed
California hasn't adopted the deduction. It's also taken after adjusted gross income, so it doesn't flow into state returns that start from federal AGI, as California's does. Your tips stay fully taxable for state income tax and State Disability Insurance.
What a California server keeps
Single, $58,000 total income in 2026, including $20,000 of tips.
Federal: taxable income drops from $41,900 to $21,900, all in the 12% bracket. Tax saved: $2,400.
California: no change. State tax is figured on the full $58,000.
Keep reporting every tip
The federal deduction only applies to reported tips. California workers who leave cash tips off their records lose the deduction on those tips and still owe tax if they're found.
Updated November 3, 2026. Sources: Internal Revenue Code §224, IRS Notice 2025-69, IRS Fact Sheet 2025-03, 2025 Schedule 1-A (Form 1040).