Does California Tax Tips and Overtime? What LA Workers Should Know
Yes. California taxes tips and overtime pay in full. The federal “no tax on tips” and “no tax on overtime” deductions that started in 2025 lower your federal tax bill, but California never adopted them. If you’re a server in Sherman Oaks, a stylist in Encino, or a crew member in Burbank, you’ll get the break on your federal return and none of it on your state return. Here’s how that works, why California’s overtime rules shrink the federal break too, and what to do about withholding.
California didn’t adopt either deduction
Federal law now lets qualified workers deduct up to $25,000 in tips and up to $12,500 in overtime premium ($25,000 for joint filers), with both phasing out above $150,000 of modified adjusted gross income ($300,000 joint). Those deductions run from 2025 through 2028.
California calculates its own taxable income and doesn’t allow either one. Every dollar of tips and overtime stays taxable on your Form 540.
A bill to change that, AB 1550, would have allowed both deductions on California returns starting in 2026. It was held in the Assembly Revenue and Taxation Committee in April 2026 and hasn’t moved since. Plan as if California will keep taxing both.
What the state tax costs you
California’s income tax rates run from 1% to 12.3%, plus an extra 1% on income over $1 million. Tips and overtime are taxed at your regular rate.
Say a server in Studio City reports $20,000 in tips for the year. Federally, that full amount may come off her taxable income. On her California return, those tips still carry about $1,200 in state tax at a 6% rate, or about $1,600 at 8%.
Tips and overtime are also subject to California State Disability Insurance (SDI). Since 2024, SDI has had no wage cap, so it applies to every dollar you earn, tips included.
California’s daily overtime rules shrink the federal break
This is the part most California workers miss. The federal overtime deduction only covers the premium the Fair Labor Standards Act requires, and federal law only requires overtime after 40 hours in a week.
California law is stricter. Employers here have to pay time-and-a-half after 8 hours in a day and double time after 12. Much of the overtime you earn in California comes from those daily rules, and that portion doesn’t count toward the federal deduction.
Here’s how that plays out. A warehouse worker in Canoga Park works four 10-hour days in a week, for 40 hours total. California requires 8 hours of overtime pay that week, 2 hours a day. Federal law requires none, because she didn’t go over 40 hours. Her federal overtime deduction for that week is zero.
A few other rules limit what counts:
- Only the premium qualifies. At $24 an hour regular pay and $36 for overtime, only the extra $12 an hour counts, and only for FLSA-required hours.
- Double time is partly excluded. Double time under California law goes beyond what federal law requires, so the extra above time-and-a-half generally doesn’t qualify.
- Union contracts can add overtime federal law doesn’t require. Production crews working under union agreements often earn daily or turnaround overtime. Only the portion the FLSA would require counts federally.
Starting with 2026 wages, your W-2 will show qualified overtime in Box 12, Code TT, and reported tips in Code TP. Your employer has to figure out the FLSA portion, so check those numbers when your W-2 arrives in January.
Keep your California withholding where it is
Some workers cut their withholding after hearing about the new federal deductions. If you adjust anything, adjust only your federal Form W-4.
Your California withholding comes from Form DE 4, and the state still expects tax on all of your tips and overtime. Lowering it can leave you with a California balance due in April, plus an underpayment penalty.
If you have big swings in tips or overtime during the year, a quick mid-year check of your California withholding can keep the April bill from being a surprise.
What to do before you file
- Keep your own record of tips, even if you report them to your employer. Your records back up the federal deduction if the IRS asks.
- When your 2026 W-2 arrives, check Code TP and Code TT against your pay stubs and your tip log.
- If you worked for more than one employer, add the amounts together. The federal caps apply to your total, not per job.
- Expect your federal refund and your California balance to move in opposite directions. The federal deduction won’t reduce what you owe the state.
Spatola & Company CPA works with employees, freelancers, and business owners across Woodland Hills and the San Fernando Valley on both the federal and California sides of their returns.
California Tips and Overtime Tax FAQs
Does California tax tips?
Yes. California did not adopt the federal tips deduction, so tip income is fully taxable on your California return at your regular state rate.
Does California tax overtime pay?
Yes. California did not adopt the federal overtime deduction, so all overtime pay remains taxable on your California return.
Does California daily overtime qualify for the federal overtime deduction?
Generally no. The federal deduction covers only the premium the Fair Labor Standards Act requires, which applies after 40 hours in a week. Overtime California requires after 8 hours in a day, and the extra portion of double time, generally does not qualify.
Are tips subject to California SDI?
Yes. Tips are wages for California State Disability Insurance, and SDI has no wage cap since 2024.
Is California going to adopt the tips and overtime deductions?
AB 1550 would have allowed both deductions starting in 2026, but it was held in committee in April 2026. As of now, California has not adopted either deduction.
