Brian Calley President and Chief Executive Officer at Small Business Association of Michigan | Official website
Brian Calley President and Chief Executive Officer at Small Business Association of Michigan | Official website
Governor Gretchen Whitmer has signed a new law in Michigan that provides state income tax deductions for tip income and overtime pay for eligible workers. The legislation, H.B. 4961, will allow tipped workers to deduct tip income from their state taxes, while non-exempt and hourly employees can deduct overtime pay. These deductions will be available for three years, from 2026 through 2028. In addition, Michigan residents who receive Social Security will no longer pay state tax on those benefits.
The state’s current income tax rate of 4.25% will not apply to income from tips, overtime, or Social Security under the new law. According to estimates by the National Law Project, the average worker reporting $9,400 in tips each year could save about $400 annually. The exemption for overtime pay is expected to benefit up to 500,000 Michigan workers, with an average annual savings of $500 per person.
For retirees, the change means that around 40,000 Michigan residents receiving Social Security payments could save approximately $500 per year. This is in addition to the existing $20,000 per taxpayer deduction on all retirement income for those over the age of 67. The new Michigan Social Security tax deduction differs from federal law and is not included in the federal One Big Beautiful Bill Act passed during the Trump administration.
Analysts estimate that these tax changes will reduce state revenue by about $158 million. To offset this loss, the law introduces a $0.20 per gallon increase in the gas tax and a new 24% wholesale tax on marijuana.
The legislation follows recent IRS guidance that clarified which jobs are eligible for federal “no tax on tips and overtime” deductions. According to the IRS, eligible occupations include Beverage and Food Service, Entertainment and Events, Hospitality and Guest Services, Home Services, Personal Services, Personal Appearance and Wellness, Recreation and Instruction, and Transportation and Delivery.
To qualify for the new deductions, businesses must track and report qualified tip income accurately. Workers may need to adjust how and when they report their tips. Employers are advised to seek training for themselves and their staff regarding these payroll tax law changes.
"Click here for more News & Resources."
Alerts Sign-up