BAKERSFIELD, Calif. (KERO) — With Wednesday's tax deadline approaching, tax professionals warn that the new "no tax on tips" rule is one of the most misunderstood parts of this filing season, especially in California.
"The number one mistake that I hear when I talk to people is they think no tax on tips means they don't even have to put it on their tax return. And that's simply not the case," Mark Steber, chief tax officer at Jackson Hewitt, said.
Steber said workers must report all tip income on their tax returns.
"Now there is a brand new deduction that never existed until this year, that gives you up to $25,000 of a deduction for qualified tips," Steber said.
However, Steber stresses that does not mean tips are completely tax-free. The situation gets more complicated for California workers because states are not required to follow federal deductions.
"Federal rules are federal rules. State rules are state rules," Steber said.
While some workers may see tax relief on their federal return, tip income may still be taxed at the state level in California. Steber says misunderstanding that difference can lead to unexpected tax bills.
With the deadline approaching, tax professionals say accuracy and preparation matter more than ever for tipped workers. Workers who rush or rely on misinformation online risk missing deductions or making costly mistakes.
"And most importantly, you need to locate your records when you go see that tax professional, because they're going to ask you for all the records of your tax year, including your earnings and your tips," Steber said.
Experts say the phrase can be misleading, and workers still need to report all income and understand how both federal and state rules apply before filing.
"Well, you can go learn those rules yourself, or you can use a tax pro who has been trained and doing them all season long and knows exactly what to ask for, exactly where to find them on your pay stub or your other records, and make sure you get the most money and biggest refund you deserve with very little risk," Steber said.
This story was reported on-air by a journalist and has been converted to this platform with the assistance of AI. Our editorial team verifies all reporting on all platforms for fairness and accuracy.
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