No Tax on Tips Still Means Massachusetts Tax on Tips
Your staff have heard that tips are not taxed any more. Half of that is true, and the half that is not will land on them in April.
The federal deductions are real. Massachusetts does not allow either of them. The Department of Revenue’s conformity table for the One Big Beautiful Bill Act lists “No tax on tips” and “No tax on overtime” with a single word against each: No (TIR 26-4). DOR states it again in plain language on its own comparison page: “Massachusetts does not allow the federal deduction of qualified tips income. All tips income must be reported in Massachusetts,” and the same sentence for overtime (Differences Between MA and Federal Tax Law for Personal Income, retrieved 2026-09-15).
For a restaurant or a salon in Hudson or Marlborough, this is not an accounting subtlety. It is a conversation your staff are going to start, and the answer they get from you is the difference between a surprise in April and a plan in September.
Key Takeaways
- Massachusetts allows neither deduction. TIR 26-4 answers “No” to both the tips and the overtime provision, and all of both must be reported on Massachusetts Form 1.
- Your withholding does not change. Massachusetts withholds 5.00% on wages, tips and overtime included, and that is correct rather than an oversight.
- The gap shows up at filing, not on the paycheck — which is exactly why people are surprised by it.
- On $20,000 of tips, the federal deduction can take the federal tax to nothing and Massachusetts still wants $1,000.
- Massachusetts also declines 100% bonus depreciation, so the federal equipment write-up does not follow through to your state return either.
Massachusetts said no to both, in writing
TIR 26-4 is a conformity table. It walks through the provisions of Public Law 119-21 and marks each one adopted or not, for the personal income tax under G.L. c. 62 and the corporate excise under c. 63.
Three consecutive lines matter here:
- Sec. 70201, No tax on tips — No
- Sec. 70202, No tax on overtime — No
- Sec. 70203, No tax on car loan interest — No
There is no phase-in and no partial adoption on those three. Compare that with Sec. 70302, research expensing, which DOR adopts in part from 2026, and Sec. 70303, business interest, adopted from 2027. The state made a deliberate, itemized set of choices, and tips and overtime fell on the “no” side of all of them.
The overtime figure also carries the limit covered in our note on the 2026 W-2 changes: only the premium half of time-and-a-half is qualified overtime at all. So the federal number in that chart is already the ceiling on a narrower amount than most people assume — and the Massachusetts number is zero regardless.
What it looks like on a real tip year
Massachusetts taxes personal income at 5.00%, and withholds on wages at the same 5.00% (Massachusetts Department of Revenue, tax rates). There is a 4% surtax above $1,107,750 for tax year 2026, which is not the situation of anyone in this conversation.
So the arithmetic on tips is a single multiplication, and it does not change because of anything that happened federally:
A server who reports $20,000 in tips can take the federal deduction, watch their federal liability on that money fall to nothing, and still owe Massachusetts $1,000 on the same dollars. Nothing about the federal change touches the state column.
Your withholding does not change, and that is correct
This is the part that generates the awkward question, so it is worth being ready for it.
Massachusetts withholding runs at 5.00% on wages, and tips and overtime are wages for that purpose. An employee who hears “no tax on tips” and then looks at their pay stub will see the Massachusetts line unchanged and conclude that payroll got it wrong.
Payroll did not get it wrong. The federal deduction is claimed on the return, not through withholding, and it does not exist at all for Massachusetts. So the correct state withholding is exactly what it was.
What changes on the federal side is the reporting, not the withholding: from tax year 2026 the W-2 carries the tip and overtime figures in their own boxes so the employee can claim the federal deduction. That is a January problem and we have written it up separately — the codes, the mandatory occupation code, and the one field most payroll systems fill in wrong are all in the 2026 W-2 walkthrough.
What to tell your staff
You are not their tax preparer and you should not try to be. But you will be asked, and a short accurate answer beats an improvised one:
- “The federal deduction is real.” Do not talk anyone out of it. Up to $25,000 of qualified tips and $12,500 of qualified overtime, on the federal return.
- “Massachusetts does not allow it.” All tips and all overtime still get reported on the state return, at 5%.
- “Your withholding is right.” The state line on the pay stub is not supposed to have moved.
- “Put something aside.” A worker whose federal bill drops and whose state bill does not is the one most likely to be short in April, because the good news arrives first.
- “Ask a preparer about your own return.” Where the line falls depends on their full picture, not on their tips alone.
Point 4 is the one worth saying out loud in September rather than March. Someone who hears “no tax on tips” in the spring and adjusts their spending has nine months to build a shortfall that is entirely avoidable.
One more thing Massachusetts declined
While you are in TIR 26-4, note Sec. 70301, full expensing for business property — No for the personal income tax and No for the corporate excise.
That is 100% bonus depreciation, and it means the federal equipment write-off does not carry to your Massachusetts return. If you bought a walk-in, a POS system or salon chairs on the strength of the federal treatment, the state depreciation schedule is a separate calculation and a separate number. Worth raising before you sign for equipment, not after. Restaurant-specific setup questions are collected in what to set up before you open in Hudson.
How this was checked
Everything above comes from the Massachusetts Department of Revenue: the TIR 26-4 conformity table for Public Law 119-21, the DOR page comparing Massachusetts and federal personal income tax treatment, and the DOR tax rates table. The federal deduction caps come from the IRS instructions for the 2026 Forms W-2 and W-3.
No figure here is taken from another article’s summary. That matters on this topic more than most, because the phrase “no tax on tips” is doing a lot of work in circulation that the statute does not do — it is a federal deduction with caps and conditions, claimed on a return, and Massachusetts is not part of it.
Green Books Inc. is a bookkeeping practice — Certified Bookkeeper (CPB), IRS Authorized e-File Agent, and Notary Public. This is general information about published rules, not tax advice, and not a review of anyone’s return. Figures were retrieved on 15 September 2026.
Frequently asked questions
Does this mean my staff pay more tax than they were told?
They pay less federal tax and the same Massachusetts tax. Nothing went up. What changed is that one of the two columns moved and the other did not, and a headline that says “no tax on tips” does not mention there are two columns.
Do we have to change anything in payroll because Massachusetts said no?
No. Massachusetts withholding was already correct at 5.00% on the full wage including tips and overtime, and it stays there. The work that does need doing is on the federal reporting side for the January W-2, which is a separate job.
A server worked in New Hampshire for part of the year. Does that change it?
Possibly, and that is a question for a preparer rather than a blog post. New Hampshire has no wage income tax, but Massachusetts residency and source rules decide what Massachusetts can tax. Do not guess at it from the state where the shift happened.
We are a salon and pay commission, not overtime. Does any of this apply?
The tips half does, on the same terms. The overtime half only reaches compensation required under section 7 of the Fair Labor Standards Act, so commission structures usually sit outside it — but “usually” is doing real work in that sentence, and it depends on how the pay is actually structured.
The conversation is easier in September
Nothing here needs fixing in your payroll. What it needs is that you know the answer before somebody asks it across the pass on a Friday night.
If you would like the tips and overtime side of your payroll checked against what the January W-2 will have to carry — or you want to work out what the Massachusetts column looks like for your own return — book a consultation. The reporting setup itself is a payroll job, and the return is tax preparation.