HF1221

Purpose

• To exempt tip income from Minnesota's individual income tax and from state tax withholding requirements.

Main Provisions

• Adds a new subdivision (Subd. 36) to Minnesota Statutes 290.0132, creating a “Tip income” provision.
• Defines tip income as amounts that an individual reports to their employer under IRS rules (specifically Internal Revenue Code Section 6053(a)) or as wages reported to the IRS as wages subject to employer taxes under IRC Section 3121(q).
• Establishes that tip income is a subtraction from a taxpayer’s income for Minnesota tax purposes (i.e., tips are not included in taxable income).
• References related adjustments to state tax provisions (including an addition to Subd. 2a of another section) to implement the tipping subtraction and withholding changes.

Significance and Impact

• Taxpayers who receive tips would have those tip amounts subtracted from Minnesota taxable income, reducing state income tax liability.
• Employers would not withhold Minnesota income tax on tip income, aligning withholding with the new exclusion.
• The bill aligns Minnesota’s treatment of tip income with how tips are reported for federal purposes.
• The change could affect state revenue and would require employers to adjust payroll and reporting practices accordingly.

How This Changes Current Law

• Current law includes tip income in taxable income and withholding where applicable.
• The bill would remove tip income from taxable income and remove withholding requirements for tip income at the state level, by adding the new subdivision and related provisions.

Potential Considerations

• Administrative burden on employers to implement the new subtraction and withholding changes.
• Interaction with federal tip reporting and other state/ local tax rules.
• Possible impact on state tax revenues and how the subtraction is applied across different payroll scenarios.

Relevant Terms

• tip income
• subtraction
• Minnesota individual income tax
• tax withholding
• Minnesota Statutes 2024 § 290.0132
• Subd. 36 (Tip income)
• Internal Revenue Code § 6053(a)
• Internal Revenue Code § 3121(q)
• wages
• employer taxes