Yes, Massachusetts does tax tips. Every dollar of gratuity you earn is subject to the state’s flat 5% income tax, and the “no tax on tips” deduction Congress passed in 2025 only applies to federal income tax. Massachusetts has not adopted it, so tipped workers in the Commonwealth get a lower federal bill while their state tax on tips stays exactly the same.
The Federal Break Doesn’t Follow You to Your State Return
The One Big Beautiful Bill Act created a new federal deduction under 26 U.S.C. § 224 that lets eligible employees and self-employed workers deduct up to $25,000 in qualified tips from federal taxable income for tax years 2025 through 2028.1Office of the Law Revision Counsel. 26 USC 224 – Qualified Tips It covers voluntary cash and charged tips in occupations that customarily received tips before January 1, 2025 — servers, bartenders, salon workers, personal trainers, and many gig roles.2Internal Revenue Service. How to Take Advantage of No Tax on Tips and Overtime
Massachusetts calculates state gross income by starting with your federal gross income and then applying its own modifications.3General Court of Massachusetts. Massachusetts Code Chapter 62 Section 2 But the state generally follows the Internal Revenue Code as it existed on January 1, 2024, and does not automatically pick up federal tax changes enacted after that date. The tip deduction was enacted in 2025, so it would take separate state legislation to make it available on a Massachusetts return. No such law has passed. Massachusetts also declines to adopt many longstanding federal deductions, including the federal standard deduction and the qualified business income deduction.4Massachusetts Department of Revenue. Differences Between MA and Federal Tax Law for Personal Income
The practical result: you deduct your tips on the federal side, then add them right back into the income you report to Massachusetts.
What the 5% Applies To
All gratuities count as earned income under Massachusetts law, whether you receive them as cash, on a credit card slip, or through a tip pool. The state’s flat 5% rate applies to all of it. Massachusetts also imposes a 4% surtax on total income above $1 million, though very few tipped workers reach that threshold.
The federal deduction has an income phase-out that starts at $150,000 for single filers and $300,000 for joint filers, disappearing entirely at $400,000 and $550,000 respectively.5Office of the Law Revision Counsel. a href=”https://uscode.house.gov/view.xhtml?req=(title:26%20section:224%20edition:prelim)” target=”_blank” rel=”noopener”>26 USC 224 – Qualified Tips That phase-out is a federal concept only. On the state side, the 5% applies from the first dollar regardless of your income level.
Penalties for Underreporting
Because tips are fully taxable in Massachusetts, underreporting them creates real exposure. If you file late or pay less than you owe, the state charges 1% per month on the unpaid balance, up to a maximum penalty of 25%.6Massachusetts Department of Revenue. Massachusetts Tax Penalty Rates Interest runs on top of that. A daily log of cash and card tips is the simplest protection.
Payroll Taxes Still Apply — Federal and State
The federal deduction is often described as “no tax on tips,” but it only touches federal income tax. Social Security and Medicare taxes still come out of your tip income in full: 6.2% for Social Security and 1.45% for Medicare, with your employer matching both amounts.7Internal Revenue Service. Topic No. 751 – Social Security and Medicare Withholding Rates Those payroll taxes fund your future retirement and healthcare benefits and are not affected by any income tax deduction.8Internal Revenue Service. One Big Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
Between Massachusetts income tax at 5%, federal payroll taxes at 7.65%, and any federal income tax you still owe after the deduction, your cash wages may not cover the total withholding. If they don’t, plan on either making estimated tax payments during the year or covering the shortfall when you file.
Reporting Tips and Handling the Two Returns
You must report your total tips to your employer by the 10th of the month after you receive them. That report can go on IRS Form 4070 (from Publication 1244), on any written statement showing your name, Social Security number, employer information, the reporting period, and total tips, or through an electronic system your employer provides. If your tips from a single employer are under $20 in a calendar month, you don’t have to report them to that employer, but the income is still taxable when you file annually.9Internal Revenue Service. Tip Recordkeeping and Reporting
Your employer uses the tips you report to withhold both federal and state taxes from your cash wages, so an underreported figure produces underwithholding on both returns. Check your pay stubs while you can still correct the numbers; errors caught at tax time are much harder to unwind.
On the federal side, you’ll claim the tip deduction for 2026 on Schedule 1-A attached to your Form 1040. It’s available whether you take the standard deduction or itemize, and your tips must appear on a W-2, 1099, or Form 4137 to qualify.10Internal Revenue Service. IRS Published Schedule Taxpayers Will Use to Claim Deductions on No Tax on Tips If you’re married, you have to file jointly to use the deduction.1Office of the Law Revision Counsel. 26 USC 224 – Qualified Tips
Then, when you prepare your Massachusetts return, include your full tip income in state gross income and calculate 5% on the whole amount. The federal deduction stays on the federal return. The state bill does not change.