Does California Tax Tips in 2026? Waiting for the FTB

California has the highest state income tax rates in the country and one of the largest service economies in the world. When the OBBBA created federal deductions for tips and overtime, the immediate question for millions of California workers was whether those savings would extend to their state returns. So far, the answer is no. The Franchise Tax Board (FTB) has not issued guidance on the OBBBA deductions, and no conformity legislation has been introduced. Here is what California workers need to know for 2026.

California's conformity status

California does not automatically conform to the federal Internal Revenue Code. The state uses its own Revenue and Taxation Code (R&TC) as the basis for personal income tax. When Congress passes new tax provisions, California requires separate legislation to adopt them. The state has a long history of selective conformity, choosing to follow some federal changes while rejecting others.

The FTB publishes conformity updates that detail which federal provisions California has adopted. As of September 2026, no update has addressed the OBBBA. The three new deductions (tips under IRC Section 224, overtime under IRC Section 225, and the senior bonus) are not recognized on California Form 540.

Given California's independent approach to tax policy, this is not surprising. The state has previously declined to conform to major federal changes when they conflicted with revenue goals or policy priorities. The OBBBA deductions could cost California billions in foregone revenue, making conformity a politically difficult choice.

Why California's impact may be the largest

Two factors make California's non-conformity especially consequential. First, the state's tax rates are the highest in the nation. The top marginal rate is 12.3%, with an additional 1% Mental Health Services Tax (MHST) on taxable income above $1 million, bringing the effective top rate to 13.3%. Even workers in the middle brackets face rates of 6%, 8%, or 9.3%, which are higher than many states' top rates.

Second, California's service economy is enormous. The state has more restaurant workers, hotel employees, and personal service providers than any other state. Los Angeles, San Francisco, San Diego, and Sacramento all have large hospitality sectors. The combination of high tax rates and a massive tipped workforce means the aggregate impact of non-conformity is potentially larger in California than anywhere else.

For an individual worker, the numbers are straightforward. A server in the 9.3% California bracket who earns $25,000 in qualified tips and deducts the full amount on their federal return would save roughly $5,500 in federal taxes (at the 22% bracket). But that same worker would save zero at the state level without conformity. If California conformed, the additional state savings would be approximately $2,325, bringing the combined savings to over $7,800.

Federal savings still apply

The federal tips deduction works the same way for California residents as for workers in any other state. You claim it on Schedule 1-A, and it reduces your federal AGI by up to $25,000. The phase-out starts at $150,000 MAGI for single filers and $300,000 for joint filers.

For a single filer in the 12% federal bracket with $18,000 in qualified tips, the federal savings are approximately $2,160. For someone in the 22% bracket, the savings on the same amount rise to about $3,960. These savings are locked in by federal law, regardless of what Sacramento decides.

The federal deduction also reduces your federal AGI, which California uses as a starting point for its own calculations. However, California typically requires taxpayers to add back deductions the state has not conformed to. If the FTB issues guidance requiring an add-back of the OBBBA deductions, even the indirect AGI benefit would be eliminated at the state level.

The overtime deduction angle

The conformity question is not limited to tips. The OBBBA overtime deduction (IRC Section 225) is also unrecognized by California. This is particularly notable because California has some of the most worker-friendly overtime rules in the country. California law requires overtime pay after 8 hours in a single day (not just 40 hours in a week), and requires double-time after 12 hours in a day.

These rules generate significantly more overtime hours for California workers compared to states that only follow the federal 40-hour weekly threshold. A worker who logs 10 hours on a single day in California earns 2 hours of overtime pay, while the same schedule in most other states would not trigger overtime at all.

The federal overtime deduction allows up to $12,500 in overtime premium deductions for single filers and $25,000 for joint filers. California workers, who tend to accumulate more overtime premium than their counterparts in other states, stand to benefit more from the federal deduction. But without state conformity, those workers still pay California income tax on their full overtime premium.

What California workers should do

The guidance for California workers mirrors the advice for any non-conforming state:

• Claim the federal deduction in full. File Schedule 1-A with your federal return. Deduct up to $25,000 in qualified tips and up to $12,500 in overtime premiums. California's position does not affect your federal filing.
• Do not adjust California withholding. Your employer should continue withholding California income tax on your full wages, including tips and overtime. Reducing withholding without confirmed conformity risks an underpayment penalty on your Form 540.
• Track your qualified amounts. Your W-2 Box 12 codes (TP for tips, TT for overtime) document what you claimed federally. Keep copies in case California eventually conforms retroactively and you need to file an amended Form 540.
• Plan for the full state tax bill. Budget for California taxes on your complete tip and overtime income. A later conformity decision might produce a refund, but that should be treated as an unexpected bonus rather than something to count on.

Watching for FTB guidance

The FTB publishes Tax News bulletins, FTB Notices, and conformity summaries when addressing federal tax changes. Any decision on the OBBBA deductions would appear in one of these publications. The California Legislature could also act through the annual budget process or through standalone legislation.

The most likely timeline for any action would be the 2027 legislative session, which begins in January. If conformity legislation is introduced and signed, it could apply retroactively to the 2026 tax year, allowing workers to file amended returns or claim the deductions on their original 2026 filing (if filed after the legislation takes effect).

We will update this page when any official guidance or legislation is published. To estimate your current federal savings, use the California tips tax calculator. For a nationwide view of which states have conformed, check the state tips and overtime tax map.