Michigan Legislature to Send HB 4961 to Governor – Eliminates State Income Tax on Tips

Part of the budget deal reached by Michigan’s state legislature includes a landmark tax change for hospitality and service workers. House Bill 4961, which has now cleared both chambers and is headed to the governor’s desk, would eliminate state income tax on tips.

Under the new measure, a “tipped employee” would be allowed to deduct from their taxable income—so long as it was included in their federal adjusted gross income—the amount of proven gratuities (i.e., tips voluntarily reported to the employer for FICA purposes).

In practical terms, this means that tips reported under the federal system will no longer be subject to Michigan income tax. The result is dollar-for-dollar tax relief: every dollar a server, bartender, bellhop, or other tipped worker reports will avoid Michigan income tax liability.

If signed by the governor, HB 4961 will mark a major shift in state tax policy, putting more money directly into the pockets of thousands of Michigan’s tipped employees who rely on gratuities as a core part of their income.

For restaurants and bars, the measure is also a welcome development. With many establishments struggling to find and keep staff, eliminating state tax on tips makes hospitality jobs more attractive and competitive. Industry leaders hope this will help drive more workers into restaurants, bars, and hotels at a time when hiring and retention remain challenging.