CA
Does California tax tips and overtime?
The federal deduction and the California deduction are separate questions. Here is where California actually lands, and why.
How California builds its tax base
California starts from your federal adjusted gross income. Both deductions are below-the-line — they reduce federal taxable income but leave AGI untouched — so neither reaches this state's return automatically. Anything you get here had to be legislated separately.
Tips in California
Still taxedCalifornia's PIT base begins at federal AGI (Form 540, Line 13 = federal Form 1040 line 11), and the IRC §224 tip deduction is a below-the-line Schedule 1-A deduction that never reduces federal AGI, so it cannot reach the California base; SB 711 (ch. Oct. 2025) advanced California's IRC 'specified date' only to Jan. 1, 2025, six months before OBBBA, so there is no affirmative conformity either. FTB's own analysis of AB 1550 states flatly: 'There is no comparable deduction for qualified tips or overtime compensation in state law.' AB 1550 (Sanchez), which would conform for TY2026-2028, stalled in Assembly Revenue & Taxation and was not enacted. The 2025 Schedule CA (540) instructions contain no tips/overtime line at all — consistent with the deduction simply never entering the California computation rather than being added back.
Source: California Franchise Tax Board, Bill Analysis of AB 1550 (Qualified Tips and Overtime Compensation Deductions Conformity), Jan. 7, 2026 · last reviewed
Overtime in California
Still taxedIdentical mechanism and identical authority: IRC §225 is a below-the-line Schedule 1-A deduction that does not reduce federal AGI, California's base starts at federal AGI, and California's conformity date (SB 711, Jan. 1, 2025) predates OBBBA. The FTB AB 1550 analysis confirms 'There is no comparable deduction for qualified tips or overtime compensation in state law.' Overtime pay therefore remains fully taxable for California PIT purposes.
Source: California Franchise Tax Board, Bill Analysis of AB 1550, Jan. 7, 2026 (State Law section); see also Grant Thornton, 'California conformity date update doesn't include OBBBA' (SB 711) · last reviewed
Whatever your state does, your payroll taxes do not change
Both deductions reduce income tax only. Social Security and Medicare are still charged on the same wages, in every state.