Illinois has officially declined to adopt the federal “no tax on tips” provision signed into law this summer, meaning service workers across the state will continue to pay Illinois income tax on their tip earnings—even as those same tips are exempt from federal taxation.
The decision places Illinois among a small group of states, including Maine and the District of Columbia, that have chosen not to conform to the federal tip exemption enacted as part of President Donald Trump’s “One Big Beautiful Bill Act” (OBBBA), which became law on July 4, 2025.
Under the federal legislation, workers in occupations that customarily receive tips can deduct up to $25,000 annually in qualified tip income from their federal taxable income for tax years 2025 through 2028. The deduction phases out for single filers with modified adjusted gross income exceeding $150,000 and for married couples filing jointly above $300,000. Workers must still pay Social Security and Medicare taxes on their tips.
The Treasury Department published a list of 68 job categories eligible for the deduction, including bartenders, servers, delivery workers, and other roles in hospitality, entertainment, and personal services.
llinois’ tax structure gives the state latitude to decline the exemption.
The Institute on Taxation and Economic Policy (ITEP) noted that Illinois, Maine, and the District of Columbia have all opted out of the tip exemption “in part because they would have lost significant revenue.” The decision comes as the state grapples with budget pressures—the Governor’s Office of Management and Budget projected Illinois would face a $267 million deficit in fiscal year 2026, partially due to other corporate tax cuts in the OBBBA. The deficit is also driven by other factors including higher-than-expected expenditures and declining consumer spending.
A One Fair Wage (OFW) report states that tipped workers in Illinois earn a median income of approximately $14,590-$16,733 annually, which is below the poverty line.
Illinois levies a flat income tax rate of 4.95% on all income. This means that while a server or bartender may now exclude up to $25,000 in tips from federal taxation, they will owe Illinois income tax on every dollar of those same tips.
Illinois House Republicans have introduced legislation that would align the state with the federal exemption. House Bill 1750, filed by Rep. Joe C. Sosnowski (R-Rockford) in January 2025, proposes to exempt both tip income and overtime compensation from state taxation.
Two additional Republican-sponsored bills—HB1898 by Rep. Jennifer Sanalitro and HB2735 by Rep. C.D. Davidsmeyer—similarly seek to eliminate state taxes on gratuities. However, all three measures remain in the House Rules Committee with no immediate action scheduled.
For Illinois workers who rely on tips, the key takeaways are:
Federal taxes: Qualified tips can be deducted up to $25,000 when filing federal returns in early 2026 for the 2025 tax year, subject to income limitations.
State taxes: All tip income remains fully taxable under Illinois law at the 4.95% flat rate.
Documentation: Tax professionals recommend that tipped workers maintain detailed records and be vigilant about state-specific regulations when filing returns in 2026.
