CalSavers Deductions and Retirement Compliance - CalSavers is now a native deduction type. Automatically withhold employee contributions, apply the right rules, and stay compliant with California’s retirement mandate. Learn more.
No Tax On Tips: Senate Passes Landmark Legislation
TLDR: The Senate just passed the No Tax on Tips Act 100–0. If it becomes law, service workers could deduct up to $25,000 in tips from taxable income starting this year. But not all tipped workers will qualify — and the House still needs to approve it.
What's in the Bill?
Up to $25K in tip income becomes non-taxable (as a federal income tax deduction)
Applies to 2025 income (if signed into law)
Workers earning over $160K in 2024 don’t qualify
Covers most cash + digital tips (cash, cards, checks, kiosks)
What's a Qualified Tip? The bill defines Qualified Tips as “any cash tip received by an individual in the course of such individual’s employment.” But don’t let “cash” confuse you — the IRS definition includes physical cash, credit card tips, debit card tips, electronic payments via kiosks or apps, and checks. If short, if the tip hits the payroll system and gets reported, it likely qualifies.
What Occupations Qualify? The Treasury will define which occupations count — expect traditional tipped roles (servers, bartenders, delivery drivers), but not blanket coverage across all service work.
FUTA Credit Reduction
What is FUTA? The Federal Unemployment Tax Act (FUTA) is a federal payroll tax paid by employers to fund unemployment compensation programs. The standard FUTA tax rate is 6.0%, applied to the first $7,000 of each employee’s annual wages. However, most employers qualify for a 5.4% credit for paying state unemployment taxes on time and in full, reducing their effective FUTA rate to 0.6%.
What is a FUTA Credit Reduction? A FUTA credit reduction occurs when a state borrows from the federal government under Title XII of the Social Security Act to cover unemployment insurance obligations and fails to repay the loan by November 10 of the second consecutive year. Employers in these states lost part or all of the 5.4% FUTA credit, increasing their FUTA tax liability.
The following states are currently at risk of a FUTA credit reduction for the 2025 tax year:
State
Potential Additional FUTA Rate
California
4.9%
New York
2.3%
Connecticut
2.0%
Employers with workers in these states should prepare for higher FUTA tax obligations if the loan balances are not repaid by the November 10, 2025 deadline.
How Zeal Manages FUTA Credit Reductions: Zeal does not preemptively withhold additional FUTA tax related to potential credit reductions. Instead:
We verify final credit reduction states after the November 10 deadline.
Estimated liabilities are communicated in mid December 2025.
Final tax amounts are confirmed and debited in January 2008.
How to Estimate Additional FUTA Liability: To estimate FUTA credit reduction liability:
Identify employees with wages in CA, NY, or CT.
Multiply the first $7,000 of each employee's wages by the applicable potential reduction rate.
Want the easy way to make sure you're always staying compliant with worker onboarding and pay? Contact us to learn how Zeal's platform and team of experts simplifies employment compliance.
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