There is no “no tax on tips” break in Minnesota. The federal One Big Beautiful Bill Act lets qualifying workers deduct up to $25,000 in tips on their federal return for tax years 2025 through 2028, but Minnesota did not adopt that deduction when it updated its conformity law in 2026. Every dollar you earn in tips is still taxed by the state at rates from 5.35% to 9.85%, and Social Security and Medicare taxes still come out at the federal level too.
Why the Federal Deduction Doesn’t Lower Your Minnesota Tax
Minnesota starts its income tax calculation from your federal adjusted gross income. The federal tip deduction is applied after AGI is calculated, so your tip income is already baked into the number Minnesota uses. A conformity analysis prepared by the Minnesota House of Representatives put it plainly: the federal tip deduction has “no effect” on Minnesota because the “deduction applies after the calculation of AGI.”1Minnesota House of Representatives. Conformity to the Public Law 119-21, the One Big Beautiful Bill Act
The 2026 Minnesota tax bill, signed May 27, moved the state’s Internal Revenue Code conformity date to May 1, 2026, but it did not create a matching state deduction for tips.2Minnesota Department of Revenue. Tax Law Changes So if you’re a server who earns $20,000 in tips in 2026, you can deduct that on your federal return, but the full $20,000 is still taxable on your Minnesota return. A smaller federal bill does not translate to a smaller state bill.
How Minnesota Taxes Your Tips
Under Minnesota Statute 290.01, state net income is tied to federal AGI, which includes all tip earnings. Cash tips handed to you at the table and tips added to credit or debit card payments both count. Tips are taxed at the same brackets as any other wages, running from 5.35% at the bottom to 9.85% at the top for tax year 2026.3Minnesota Department of Revenue. Minnesota Income Tax Brackets, Standard Deduction and Dependent Exemption Amounts for Tax Year 2026
Minnesota is also a “no tip credit” state. Employers must pay the full state minimum wage — $11.41 per hour effective January 1, 2026, for all employers — on top of your tips, rather than counting tips toward the minimum.4Minnesota Department of Labor and Industry. Minimum Wage in Minnesota5Minnesota Department of Labor and Industry. Tips, Tip Credit Your guaranteed hourly floor is higher, but the combined wages plus tips also produce a larger taxable amount for state purposes.
FICA Still Applies
Even at the federal level, the tip break is an income tax deduction, not an exclusion from gross income. Social Security and Medicare taxes are unchanged. Employers still withhold 6.2% for Social Security (on wages up to $184,500 in 2026) and 1.45% for Medicare on all tip income.6SSA. Contribution and Benefit Base
What You Do Get Federally
The federal deduction is worth claiming if you qualify. It caps at $25,000 per year regardless of filing status, and both itemizers and non-itemizers can take it for tax years 2025 through 2028.7IRS. Treasury, IRS Issue Final Regulations Listing Occupations Where Workers Customarily and Regularly Receive Tips Under the One Big Beautiful Bill
Eligibility is narrower than it sounds. Your job has to be on the IRS’s finalized list of more than 70 occupations that customarily and regularly received tips on or before December 31, 2024, grouped into categories that include food and beverage service, hospitality, personal appearance and wellness, transportation and delivery, entertainment, and home services. Tips must be paid voluntarily by the customer, so mandatory service charges usually don’t count unless the customer could modify the charge.7IRS. Treasury, IRS Issue Final Regulations Listing Occupations Where Workers Customarily and Regularly Receive Tips Under the One Big Beautiful Bill
There’s an income ceiling too. Workers whose total compensation exceeded $160,000 in the prior tax year (adjusted annually for inflation) cannot claim it at all. Below that hard cutoff, the deduction phases out starting at $150,000 of modified adjusted gross income for single filers and $300,000 for joint filers.8Congress.gov. S.129 – No Tax on Tips Act 119th Congress (2025-2026)
For amounts earned in 2026, employers report each employee’s Treasury Tipped Occupation Code in a new Box 14b of Form W-2, and qualified tip amounts show up in Box 12 with code “TP.” You’ll need your Social Security number on the return to claim the deduction. Self-employed workers in qualifying occupations, including gig workers, can claim it, capped at net income from the tipped activity.
Reporting Your Tips
Federal law requires you to report tips to your employer by the 10th of the month after you received them, but only if tips from that job totaled $20 or more during the month. If tips from a single employer stayed under $20 for the month, no report to that employer is required for that period — the income is still taxable on your return, however.9Internal Revenue Service. Publication 531 – Reporting Tip Income
Form 4070 is now historical. Instead, submit a written or electronic statement to your employer with your name, address, Social Security number, the employer’s name and address, the reporting period, and total tips for that period. Sign, date, and keep a copy. Many employers have their own electronic system.9Internal Revenue Service. Publication 531 – Reporting Tip Income
Keep a Daily Tip Record
For each shift, log the date, cash tips received, tips from credit and debit card transactions paid to you by the employer, the value of any noncash tips, and the names and amounts of tips paid to other employees through pooling or splitting. A diary, a spreadsheet, or copies of charge slips all work.10Internal Revenue Service. Publication 531 – Reporting Tip Income
Hold onto these records at least three years after filing the return they support. If income was underreported in a given year, the IRS can look back six or seven years, so longer is safer. That covers both your daily logs and the statements you gave your employer.
What Happens If You Don’t Report Tips
If you received $20 or more in tips during a month and didn’t report them to your employer, you owe the Social Security and Medicare taxes on those tips yourself when you file. You handle that with Form 4137 (Social Security and Medicare Tax on Unreported Tip Income). Social Security tax is 6.2% up to the $184,500 wage base; Medicare is 1.45% with no cap.11Internal Revenue Service. Form 4137 – Social Security and Medicare Tax on Unreported Tip Income
On top of the self-assessed FICA, the IRS can impose an accuracy-related penalty of 20% on any underpayment caused by negligence or a substantial understatement of income. Failing to report tips that your employer already reported on an information return is one of the strongest indicators of negligence the IRS recognizes. An understatement is substantial if it exceeds the greater of $5,000 or 10% of the tax that should have been shown on the return. Reasonable cause and good faith are defenses; not knowing tips are taxable is not.
Filing Form 4137 has an upside beyond avoiding penalties. It credits the unreported tips to your Social Security earnings record, which factors into your eventual retirement benefit. Skipping the form can quietly shrink that benefit decades later.
Could Minnesota Change This?
A standalone bill, HF3525, was introduced in the Minnesota House to create a state-level tip income exemption mirroring the federal one. The House Taxes Committee laid it over for possible inclusion in an omnibus tax bill, and the Minnesota Department of Revenue estimated it would reduce the General Fund by $126 million in Fiscal Year 2027.12Minnesota House of Representatives. State Taxes on Tips and Some Overtime Pay Would Be Eliminated Under Laid-Over Bill It was not included in the final 2026 tax legislation. Until the legislature passes something, plan on your tips being fully taxed at the state level.