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SF1006 (Legislative Session 94 (2025-2026))

Tip income exemption from the individual income tax and tax withholding requirements provision

AI Generated Summary

Purpose

The bill aims to exempt tip income from Minnesota's individual income tax and from Minnesota tax withholding. It would create a new provision in state law to treat tips as a subtraction from taxable income and define what counts as tip income.

Main Provisions

  • Add new Subdivision to Minnesota Statutes 2024 section 290.0132 establishing a subtraction for tip income.
    • The amount of tips becomes a subtraction from an individual’s Minnesota taxable income.
  • Define “tip income” to include amounts that an individual reports to their employer as required under the Internal Revenue Code (IRC) section 6053a.
  • Clarify that tip income is considered wages for purposes related to employer taxes under IRC section 3121(q) (notice and demand for payment of the employer portion of payroll taxes).
  • Cause: By designating tip income as a subtraction, the bill would remove tip amounts from the portion of income subject to Minnesota income tax and Minnesota income tax withholding.

Significant Changes to Existing Law

  • Creates a new Subdivision (Tip income) under Minnesota Statutes 2024 section 290.0132, defining tip income and establishing its subtraction from income for tax purposes.
  • References to a related change in Minnesota Statutes 2024 section 290.92 (subdivision 2a) to align with the new tip income treatment.
  • Explicitly ties tip income to both tipping reporting requirements (IRC 6053a) and to the employer tax framework (IRC 3121(q)).

How It Would Apply in Practice

  • For individuals with tip income reported to their employer under IRC 6053a, those tip amounts would be subtracted from Minnesota gross income, reducing or eliminating Minnesota individual income tax on those tips.
  • Employers would treat tip income as wages for the purpose of employer payroll taxes under IRC 3121(q), affecting how wages and tips are handled for payroll tax purposes at the federal level, while Minnesota would not tax those tips under state income tax.
  • Minnesota withholding: Tip income would be exempt from Minnesota income tax withholding, per the bill’s stated objective.

Potential Implications

  • Revenue impact for Minnesota’s general fund, since tip income would no longer be taxed at the state level.
  • Administrative considerations for employers in documenting and reporting tip income under IRC 6053a, and for aligning with the bill’s definitions.
  • Federal-state tax interactions and potential changes in employee take-home pay or tax planning related to tips.

Relevant Terms tip income subtraction Minnesota income tax tax withholding Minnesota Statutes 2024 section 290.0132 Subd. 36 (Tip income) 6053a Internal Revenue Code notice and demand for payment of employer taxes 3121(q) employer taxes wages tip reporting 290.92 subdivision 2a

Bill text versions

Actions

DateChamberWhereTypeNameCommittee Name
February 06, 2025SenateActionIntroduction and first reading
February 06, 2025SenateActionReferred toTaxes

Citations

 
[
  {
    "analysis": {
      "added": [
        "Adds Subd. 36 'Tip income' establishing tip income as a subtraction from taxable income."
      ],
      "removed": [
        "No explicit removals; no existing provision removed."
      ],
      "summary": "This bill adds Subd. 36 to Minnesota Statutes 2024 section 290.0132 to exempt tip income from the individual income tax.",
      "modified": [
        "Amends 290.0132 by adding Subd. 36."
      ]
    },
    "citation": "290.0132",
    "subdivision": "Subd. 36"
  },
  {
    "analysis": {
      "added": [
        "Adds Subd. 2a to 290.92 (content not shown in excerpt)."
      ],
      "removed": [],
      "summary": "This bill adds Subd. 2a to Minnesota Statutes 2024 section 290.92 related to tip income provisions.",
      "modified": [
        "Amends 290.92 by adding Subd. 2a."
      ]
    },
    "citation": "290.92",
    "subdivision": "Subd. 2a"
  },
  {
    "analysis": {
      "added": [
        "Cites 26 U.S.C. § 6053A as part of the definition of tip income."
      ],
      "removed": [],
      "summary": "The bill references federal law 26 U.S.C. § 6053A (TIP reporting to employer) to define tip income under Subd. 36.",
      "modified": []
    },
    "citation": "26 U.S.C. § 6053A",
    "subdivision": ""
  },
  {
    "analysis": {
      "added": [
        "Cites 26 U.S.C. § 3121(q) as the wage basis for withholding of employer taxes related to tips."
      ],
      "removed": [],
      "summary": "The bill references federal law 26 U.S.C. § 3121(q) (notice and demand for payment of employer taxes) in connection with tip income and wages.",
      "modified": []
    },
    "citation": "26 U.S.C. § 3121(q)",
    "subdivision": ""
  }
]

Progress through the legislative process

17%
In Committee

Sponsors

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