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SF1525 (Legislative Session 94 (2025-2026))

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

Related bill: HF1368

AI Generated Summary

Purpose

  • The bill aims to exempt tip income from Minnesota’s individual income tax and from tax withholding requirements. In other words, it would treat tip income as not subject to Minnesota state income tax and not subject to state tax withholding.

Main Provisions

  • Adds a new subdivision to Minnesota Statutes 2024 section 290.0132, called Subdivision 36: Tip income.
    • Subdivision 36.a: Tip income is a subtraction from the taxpayer’s Minnesota adjusted gross income (i.e., it reduces taxable income).
    • Subdivision 36.b: Defines tip income as amounts that an individual reports to their employer under IRS rules (specifically section 6053a of the Internal Revenue Code) or amounts the individual reports to the Internal Revenue Service as wages that are subject to notice and demand for payment of employer taxes under section 3121(q) of the Internal Revenue Code.
  • Adds related provisions to Minnesota Statutes (section 290.92 subdivision 2a or related subdivision) to incorporate the same or compatible definitions and treatment for tip income, aligning with the definition above and ensuring tips are treated as wages/income for tax purposes only to the extent described.

How it changes existing law

  • Creates a new “tip income” subtraction that reduces Minnesota taxable income.
  • Specifically ties the definition of tip income to federal reporting rules (IRS section 6053a) and the related employer tax rules (IRC section 3121(q)), ensuring that tips reported under federal rules are not taxed or withheld at the state level.
  • Effectively exempts tip income from Minnesota individual income tax and from Minnesota tax withholding requirements, based on the defined interpretation of tip income.

Administration and Implementation Considerations

  • Taxpayers who earn tips would need to rely on federal tip reporting (6053a) to determine what portion qualifies as tip income under this subtraction.
  • State forms, withholding rules, and administrative guidance would need to reflect the new subtraction and ensure consistency with the federal definitions.
  • Revenue implications for the state would depend on how many taxpayers have tip income eligible for the subtraction and how much tip income is affected.

Significance and Impacts

  • For tip-earning workers (e.g., service industry workers), the bill could lower Minnesota taxable income and reduce state withholding, potentially increasing take-home pay.
  • The change could affect state revenue and require adjustments to budgeting and financial forecasting.
  • Requires alignment with federal tip reporting rules to avoid inconsistencies between federal and state tax treatment.

Relevant Terms - tip income - subtraction - Minnesota Statutes 2024 - section 290.0132 - Subdivision 36 - 6053a - Internal Revenue Code - 3121(q) - wages - tax withholding - employer taxes - Minnesota tax - Minnesota Statutes 2024 section 290.92 (or related subdivision)

Bill text versions

Actions

DateChamberWhereTypeNameCommittee Name
February 17, 2025SenateActionIntroduction and first reading
February 17, 2025SenateActionReferred toTaxes
May 18, 2025SenateActionChief author stricken
May 18, 2025SenateActionChief author added

Citations

 
[
  {
    "analysis": {
      "added": [
        "Adds Subd. 36 'Tip income' to MS 290.0132 to establish tip income as a subtraction from Minnesota taxable income.",
        "Defines 'tip income' as amounts that individuals report to their employer as required under IRC §6053A and as wages subject to employer payroll tax obligations under IRC §3121(q)."
      ],
      "removed": [],
      "summary": "Adds Subd. 36 'Tip income' to Minnesota Statutes 2024 section 290.0132 to treat tip income as a subtraction from Minnesota taxable income; defines tip income with reference to federal reporting and payroll tax obligations.",
      "modified": []
    },
    "citation": "Minnesota Statutes 2024 section 290.0132",
    "subdivision": "Subd. 36"
  },
  {
    "analysis": {
      "added": [
        "Adds Subd. 2a to MS 290.92; content of Subd. 2a is not shown in the provided text."
      ],
      "removed": [],
      "summary": "Adds Subd. 2a to Minnesota Statutes 2024 section 290.92 (content not provided in excerpt).",
      "modified": []
    },
    "citation": "Minnesota Statutes 2024 section 290.92",
    "subdivision": "Subd. 2a"
  },
  {
    "analysis": {
      "added": [
        "Tip income is tied to amounts reported under IRC §6053A."
      ],
      "removed": [],
      "summary": "References federal reporting requirements under IRC §6053A to define tip income for the Minnesota subtraction.",
      "modified": []
    },
    "citation": "Internal Revenue Code, 26 U.S.C. §6053A",
    "subdivision": ""
  },
  {
    "analysis": {
      "added": [
        "Tip income includes wages that are subject to payroll tax obligations under IRC §3121(q)."
      ],
      "removed": [],
      "summary": "References wage amounts that are subject to notice and demand for payment of employer taxes under IRC §3121(q).",
      "modified": []
    },
    "citation": "Internal Revenue Code, 26 U.S.C. §3121(q)",
    "subdivision": ""
  }
]

Progress through the legislative process

17%
In Committee

Sponsors

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