Arizona’s tipped workers start snowbird season with no tax on tips, at both levels

ByBNW TEAM

At 6:40 on a Friday evening in Old Town Scottsdale, the first wave of winter visitors is already three deep at the host stand. A server working the patio will carry maybe 30 checks before close, and most of what she takes home tonight will arrive as tips. Between October and April, that pattern repeats across the Valley, from Mesa breakfast spots to Tempe sports bars.

What changed this year is the tax bill attached to those tips. Arizona’s tipped workers head into snowbird season with no tax on tips at both the federal and the state level, a combination that did not exist a year ago and that only became fully settled in June.

How Arizona got here

The federal piece came first. The law signed on July 4, 2025, widely called the One Big Beautiful Bill Act, created a deduction of up to $25,000 a year for qualified tips, running from tax year 2025 through 2028. It phases out for higher earners, above $150,000 of modified adjusted gross income, or $300,000 for joint filers, and it is available whether or not a worker itemizes.

The state piece took longer. Governor Katie Hobbs issued an executive order in late 2025 directing the Department of Revenue to include subtractions for tips and overtime on the 2025 state forms, but the statute itself was not updated, and through the spring filing season the state treatment still rested on an order rather than a law. The uncertainty ended on June 13, 2026, when Hobbs signed a state budget that conformed Arizona’s tax code to the federal changes, including a subtraction for qualified tips retroactive to January 1, 2025. Legislative Republicans described Arizona as the first state to align its tax law with the federal package. Servers juggling the deduction on two returns had good reason to look for trusted tax preparation help in Arizona during the spring. The June vote finally gave preparers a firm answer.

Arizona’s flat income tax rate is 2.5%, so the state savings are smaller than the federal ones. Still real money, though. On $20,000 of qualified tips, the state subtraction alone is worth about $500.

And the subtraction reaches back. Because the conformity law is retroactive to January 1, 2025, tips earned during last winter’s season are covered on the state side too, which matters for workers who filed their 2025 Arizona return before the June vote and want to confirm it was handled correctly.

Photo: StockSnap (CC0) 

What no tax on tips still leaves taxed

The slogan oversells the change. Social Security and Medicare taxes still apply to every reported tip, so payroll withholding on a server’s check does not disappear. The deduction lowers income tax, nothing more.

The definition of a qualified tip also carries conditions. Final regulations issued by the Treasury Department and the IRS in April 2026 list more than 70 occupations that customarily receive tips, grouped into eight categories ranging from beverage and food service to transportation and delivery. Tips have to be voluntary. A mandatory service charge added to a party of eight is treated as wages, not as a tip, even when the restaurant passes it to staff. Married workers must file jointly to claim the deduction, and the tips must show up on a W-2 or 1099 or be reported by the employee on Form 4137.

But tip pools do count. A busser or bartender who receives a share through a mandatory or voluntary tip-sharing arrangement can treat that share as qualified, as long as the occupation is on the list.

The season ahead

Restaurant owners have decisions to make too. Operators that add automatic gratuities for large groups now have a reason to consider suggested tip lines instead, because a voluntary tip helps staff at tax time while a fixed service charge does not. The trade-off is less predictable pay for servers on slow nights. Employers that track tips and overtime as separate pay items in platforms such as ADP, Gusto or Toast make year-end reporting cleaner for everyone.

Wages are moving as well, and the two changes interact. A server earning the tipped minimum takes most of her income as tips, which is exactly the income the deduction targets.

The numbers: Arizona’s minimum wage is $15.15 an hour in 2026, and employers may pay tipped staff up to $3.00 less, or $12.15, provided tips bring total pay up to the full minimum. Flagstaff and Tucson set higher local rates. The 2027 figure is due this fall under Proposition 206’s annual inflation adjustment.

For workers, the practical steps are short:

  • Report every cash tip through the employer’s system on the day it is earned.
  • Keep a personal log that matches the pay stubs.
  • Ask in writing whether any charge on a group check is mandatory.
  • Save every W-2, including those from short seasonal jobs.

A four-year window

No tax on tips is not permanent. Both the federal deduction and the matching state subtraction are scheduled to end after 2028 unless lawmakers extend them. For Arizona’s hospitality workers, this is the first winter season they can plan from the opening shift with the rules settled on both returns.

By April, the snowbirds will head north again. The tips they leave behind, for once, will mostly stay with the people who earned them.