No Tax on Tips in Virginia: Who Qualifies and What to Claim

Under a 2026 Virginia law, you can subtract part of your federal tip deduction from your Virginia taxable income, so “no tax on tips” in Virginia is really a partial state subtraction stacked on top of the federal deduction. For tax year 2026, the Virginia subtraction equals 25 percent of your federal tip deduction; for 2027 and 2028, it rises to 50 percent.¹ The federal piece, created by the One, Big, Beautiful Bill Act, lets eligible workers deduct up to $25,000 in qualified tip income per year for tax years 2025 through 2028.²

How the Federal and Virginia Pieces Stack

The Virginia subtraction is calculated directly from the federal deduction you actually claim. Deduct $25,000 federally in 2026, and your Virginia subtraction is $6,250. The same federal deduction in 2027 or 2028 produces a $12,500 Virginia subtraction. You can claim the subtraction whether you take Virginia’s standard deduction or itemize.³

In dollar terms, the state piece is modest. Virginia’s top income tax rate is 5.75 percent, which applies above $17,000 in taxable income.⁴ A $6,250 subtraction at that rate saves roughly $359; a $12,500 subtraction saves about $719. The federal deduction does the heavy lifting, but the two work together, and skipping the Virginia line costs you real money.

Who Qualifies

Eligibility starts at the federal level. You have to work in an occupation that “customarily and regularly” received tips on or before December 31, 2024. Treasury published a list of those occupations and assigned each one a Treasury Tipped Occupation Code (TTOC) that your employer puts on your W-2.⁵

The list is broader than most people expect. It covers:

Food service: bartenders, wait staff, cooks, food preparation workers, fast food and counter workers, dishwashers, hosts
Hospitality: concierges, hotel desk clerks, bellhops, maids and housekeeping cleaners
Entertainment: gambling dealers, musicians, DJs, digital content creators, ushers
Home services: home repair workers, landscapers, plumbers, electricians, locksmiths
Personal services: pet caretakers, tutors, nannies, private event planners and photographers
Personal appearance: barbers, hairstylists, skincare specialists, massage therapists

Tips received in health care, performing arts, and athletics are specifically excluded.⁵

Self-employed workers in qualifying occupations can also claim the federal deduction, but the amount cannot exceed their net income from that business.² For the Virginia subtraction, you file Form 760 as a resident or Form 763 as a nonresident with Virginia-source tip income. If you qualify federally, you qualify in Virginia on the same tips.

When the Deduction Shrinks

The federal deduction phases out once your modified adjusted gross income exceeds $150,000 single or $300,000 joint. Because Virginia’s subtraction is a percentage of what you actually deducted federally, the phaseout cuts your state benefit too.³ If your income is high enough that the federal deduction disappears entirely, so does the Virginia subtraction. There is no separate state-level income test.

What Counts as a Qualified Tip

Only voluntary tips from customers qualify. Qualified tips include cash tips, credit card tips, and amounts received through tip sharing arrangements.² Regular wages, overtime, and performance bonuses do not count.

Tips Versus Service Charges

This is where most people get tripped up. The IRS treats a payment as a tip only when the customer freely chose to pay it, set the amount without the employer dictating it, and chose who receives it. If any of those three is missing, it’s a service charge, not a tip.⁶

Automatic gratuities on large-party restaurant bills, banquet event fees, hotel room service charges, and bottle service charges are all service charges. Your employer reports them as regular wages on your W-2, and they are not eligible for the deduction at either level.⁶

Tip Pools

Tips received through a valid tip pool still qualify. Federal law lets employers who take a tip credit require sharing only among traditionally tipped employees like servers and bussers. Employers who pay the full minimum wage can include non-tipped workers like cooks and dishwashers. Managers, supervisors, and owners cannot participate in a pool.⁷ What you actually receive after redistribution is your qualified tip income.

Reporting Tips to Your Employer

None of this works unless you report your tips. Federal law requires you to report cash tips of $20 or more in any calendar month to your employer by the 10th of the following month. Only tips reported to your employer, or reported by you on Form 4137 for amounts your employer didn’t capture, qualify for the deduction.⁸

Failing to report tips can draw a penalty equal to 50 percent of the Social Security and Medicare tax owed on the unreported amount. You can avoid the penalty by showing reasonable cause and attaching an explanation to your return.⁹ A daily tip log is the simplest way to protect both your deduction and your records if the IRS or Virginia asks later.

What to Check on Your W-2

Starting with tax year 2025, the W-2 carries new fields for the tip deduction. Your employer reports the total cash tips you reported to them in Box 12, Code TP. Your Treasury Tipped Occupation Code appears in Box 14b. If you worked in more than one tipped occupation, your employer can list up to two codes; if some of your tip income came from a non-qualifying occupation, your employer enters “000” for that position.¹⁰

The Box 12 Code TP figure drives your federal deduction (up to the $25,000 cap), and your Virginia subtraction flows from that same number. Self-employed workers report tips on Form 1099 or directly through Form 4137 instead of a W-2.² Before you file, compare the Box 12 Code TP figure to your own tip log. If they don’t match, sort it out with your employer first; filing with inconsistent numbers can trigger processing delays or inquiries from the Department of Taxation.

Claiming the Subtraction on Your Virginia Return

Virginia handles the subtraction on Schedule ADJ. Take the federal tip deduction you claimed, multiply by 25 percent for tax year 2026 or 50 percent for 2027 and 2028, and enter that amount on the schedule. The total then carries to the corresponding line on Form 760 for residents or Form 763 for nonresidents and part-year residents. Most filers submit electronically through the Virginia Tax website or approved software.

Both the federal deduction and the Virginia subtraction expire after tax year 2028 unless Congress and the General Assembly extend them.¹

What the Deduction Does Not Change

The Virginia subtraction and the federal deduction reduce income tax only. Your reported tips are still subject to Social Security and Medicare withholding, so they continue building your earnings record for retirement. Social Security calculates your benefit from your 35 highest-earning years of indexed earnings, so every dollar of reported tips raises that average.¹¹

Underreporting tips to dodge payroll taxes now costs you twice: you lose the income tax deduction, because unreported tips don’t qualify, and you shrink your future Social Security check. Reporting fully has never paid off more than it does under this law.

1
Virginia Legislative Information System. Virginia SB 694 – Income Tax, State Subtractions for Tips
2
Internal Revenue Service. One, Big, Beautiful Bill Act – Tax Deductions for Working Americans and Seniors
3
Virginia Department of Taxation. 2026 Fiscal Impact Statement – SB 694
4
Virginia Department of Taxation. Virginia Tax Rate Schedule and Tax Table
5
U.S. Department of the Treasury. Occupations That Customarily and Regularly Received Tips
6
Internal Revenue Service. Tips Versus Service Charges – How to Report
7
U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act
8
Internal Revenue Service. Tip Recordkeeping and Reporting
9
Internal Revenue Service. Form 4137 – Social Security and Medicare Tax on Unreported Tip Income
10
Internal Revenue Service. General Instructions for Forms W-2 and W-3
11
Social Security Administration. Social Security Benefit Amounts