Purpose

To change Minnesota state income tax rules so that tip income reported by workers becomes exempt from Minnesota individual income tax and from Minnesota tax withholding. The bill would add a new subtraction in the state tax code using federal definitions of tip income.

Main provisions

• Add a new subdivision (Subd. 36) to Minnesota Statutes 290.0132, creating a defined category called “Tip income.”
  • a. The amount of tips is a subtraction from the taxpayer’s Minnesota taxable income.
  • b. Tip income is defined as amounts that an individual reports to their employer under IRS Section 6053(a) or to the IRS as wages that are subject to employer payroll taxes under IRS Section 3121(q).
• The effect of the subtraction is to exclude those tip amounts from Minnesota individual income tax and from Minnesota tax withholding, as long as the tips are reported as described.

How it works in practice

• If a worker properly reports their tips to their employer (under 6053(a)) or to the IRS as wages for payroll taxes (under 3121(q)), that tip amount would be subtracted from Minnesota adjusted gross income for tax purposes.
• This means reported tip income would not be taxed by Minnesota for individual income tax, and would not be subject to Minnesota tax withholding, while other wages remain taxable and withheld as before.

Significant changes to existing law

• Creates a new Subdivision 36 in Section 290.0132 to define “Tip income” and establish it as a subtraction from Minnesota taxable income.
• Ties the definition to federal reporting requirements (6053(a)) and federal payroll-tax concepts (3121(q)).
• Broadly shifts tax treatment of tip income from Minnesota’s individual income tax toward an exemption when tips are properly reported, potentially reducing tax liability for tip-receiving workers at the state level.

Potential implementation considerations

• Applies only to tip income that is properly reported to the employer or the IRS; unreported tips would not receive the subtraction.
• Impacts on tax withholding for tip income; tips meeting the defined criteria would not be withheld for Minnesota income tax.

Relevant terms - Tip income - Subtraction (tax subtractive provision) - Minnesota taxable income / Minnesota individual income tax - Minnesota Statutes 290.0132 - Subdivision 36 (Subd. 36) - 6053(a) of the Internal Revenue Code - 3121(q) of the Internal Revenue Code - tax withholding - wages - employer taxes