Details of Public Law 119-21, section 70201 , One Big Beautiful Bill Act

This provision would allow a deduction of up to $25,000 for qualified tips received during the taxable year beginning on or after December 31, 2024, and before January 1, 2029. The deduction is reduced for taxpayers whose modified adjusted gross income (MAGI) exceeds $150,000 ($300,000 for married filing joint). This provision also allows this deduction in addition to the standard deduction for taxpayers who do not itemize.

This provision defines “qualified tips” as cash paid, or amounts charged, including amounts received by an employee under any tip sharing arrangement in an occupation that receives tips on a customary and regular basis. Qualified tips do not include amounts that are not provided voluntarily, not in a specified service trade or business, or excluded under guidance to be established by the Secretary.

This provision requires a valid Social Security Number (SSN) to be provided on the return to claim the deduction. An omission of the correct SSN on the return is treated as a math or clerical error. Additionally, in the case of a married individual, they must file a joint return to claim the deduction.

This provision excludes amounts deducted under this provision from the definition of qualified business income. This provision expands the types of businesses that can take the credit for employer social security taxes paid to include beauty services, such as barbering and hair care, nail care, esthetics, and body and spa treatments, where tipping is customary.

This provision requires information reporting by employers to the Secretary of the Treasury and to the employee on the tip income received and occupation of the employee on information returns and statements furnished to the taxpayer.

This provision requires the Secretary of the Treasury, no later than 90 days after the enactment of this Act, to publish a list of occupations that regularly and customarily received tips on or before December 31, 2024. The Secretary is required to modify the withholding calculations to include the new deduction.

California conforms, under the PITL, to the definition of taxable income under IRC section 63, as of the specified date of January 1, 2025, with modifications. California does not conform to the federal standard deduction amounts but instead has its own standard-deduction law. Nonresidents and part-year residents are allowed a standard deduction as modified by the ratio that California AGI bears to total AGI (not to exceed 100 percent). California generally conforms, under the PITL, to additional itemized deductions, as of the specified date of January 1, 2025, with modifications. 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 tips received.

Additionally, California does not conform to the federal deduction for qualified business income of pass-through entities under IRC section 199A. As a result, California does not conform to the exclusion of the amount of tips that a deduction is allowed from “qualified business income” for the purposes of the qualified business income deduction.

Under the Administration of Franchise and Income Tax Law (AFITL), the Franchise Tax Board (FTB) may require a copy of any information return required to be filed with the Secretary of the Treasury, at the time, and in the form and manner as the FTB may, by forms and instructions, require . As a result, California would conform to the changes requiring the information return related to the tip income received and occupation of the employee.

Additionally, under the AFITL, FTB treats specified errors identified on the return during processing as math errors, which includes not providing a valid identification number as required to claim a dependent exemption tax credit, earned income tax credit, young child tax credit, or foster your tax credit. California does not conform to the definition of mathematical or clerical error under IRC section 6213. As a result, California does not conform to the changes made by this provision related to IRC section 6213.

California does not conform to the employer credit for social security taxes under IRC section 45B. As a result, California does not conform to the changes made to this provision.

Annually, FTB is required to provide the EDD with wage withholding tables to be used by employers to withhold taxes on wages paid to their employees. The tables are based on the estimated amount of tax due on the wages paid by the employer. FTB does not conform to the requirement to modify withholding calculations under IRC section 3402.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

26/27 27/28 28/29 29/30 ($600,000,000) ($410,000,000) ($200,000,000) $0