North Carolina no tax on tips
Executive summary
North Carolina does not automatically exempt tips from taxation at the state level; federal law created a temporary “no tax on tips” style deduction for qualified tips beginning with tax year 2025, and North Carolina lawmakers have proposed mirroring that relief via House Bill 11, but the state’s treatment depends on whether the General Assembly amends state law to conform with or adopt the new federal provisions [1] [2] [3].
1. What the federal change actually does and when it started
The federal “No Tax on Tips” provision created by recent federal legislation allows eligible workers to deduct qualified tip income up to $25,000 on their federal income tax returns for the 2025–2028 period, meaning tips earned in 2025 are claimed on returns filed in 2026, and the IRS issued guidance to help taxpayers and employers apply the rule [1] [4] [5].
2. North Carolina’s statute and the legislative push (HB 11)
State lawmakers introduced House Bill 11 in the 2025–2026 session explicitly titled “No Tax on Tips, Overtime, Bonus Pay,” which would create state-level income tax deductions for tips (reported as tips required to be reported to an employer under federal tax code), overtime compensation, and limited bonus pay, adding those deductions to the list used to calculate North Carolina taxable income [6] [7] [2].
3. Administrative reality: conformity, timing and the Department of Revenue’s caution
North Carolina computes state taxable income by starting with the federal return and then choosing whether to adopt federal changes made after January 1, 2023; the N.C. Department of Revenue warned that the General Assembly was scheduled to convene after the April 15, 2026 filing deadline and could decide whether to reference federal changes for tax year 2025, which creates ambiguity for filers until the legislature acts [3].
4. Who benefits and who might lose under state-level adoption
Proponents portray the deduction as targeted relief for tipped workers; analysts and advocates note that a tip deduction could reduce tax burdens for servers and other tipped occupations [1] [4]. Critics such as the Tax Foundation argue that carving out tips (and overtime) introduces distortions that favor certain workers over comparable non‑tipped workers and can create inequities—illustrated by hypothetical comparisons of two earners with the same total income but different mixes of wages and tips [8].
5. Fiscal and policy trade-offs in North Carolina’s broader tax debate
The tips deduction sits inside a broader state debate over aggressive income tax cuts and targeted exemptions: North Carolina’s individual rate is scheduled to fall to 3.99% for the 2026 taxable year, with further cuts contemplated, and watchdogs such as ITEP argue that broad rate cuts disproportionately benefit the wealthy while targeted deductions could complicate fairness and revenue forecasting [9] [10]. The Tax Foundation recommends neutral reforms like lowering rates or increasing the standard deduction rather than narrow exemptions that shift tax burdens or complicate compliance [8].
6. Bottom line and what to watch this filing season
For federal purposes, eligible taxpayers should be prepared to claim the tip deduction for tax year 2025 on returns filed in 2026 according to federal guidance [4] [5]; for North Carolina state tax, whether tips are “no tax” depends on legislative action—House Bill 11 would create a state deduction, but until the General Assembly explicitly adopts such a change or signals conformity with the federal amendments, taxpayers must follow state filing instructions and monitor NCDOR and legislative updates [6] [3] [2].