New Compliance Requirements Under Michigan’s Temporary Tax Relief for Tipped and Hourly Workers

Governor Gretchen Whitmer has signed H.B. 4961, a new Michigan law creating temporary state income tax deductions for tip income and overtime pay.  The measure, which applies for tax years 2026 through 2028, will temporarily exempt these categories of income from Michigan’s 4.25% personal income tax rate.  While the legislation is aimed at boosting take-home pay for workers, it also introduces new payroll and reporting responsibilities for employers, particularly those in industries where tips and overtime are common.

Tip Income Exemption

Under the new law, “qualified tips” received by employees in occupations that “customarily and regularly receive tips” will be deductible from Michigan taxable income.  Recent IRS guidance aligns with this approach at the federal level, identifying eight occupational categories that may qualify for “no tax on tips” treatment:

• Food and Beverage Service
• Entertainment and Events
• Hospitality and Guest Services
• Home and Personal Services
• Personal Appearance and Wellness
• Recreation and Instruction
• Transportation and Delivery

The Michigan Department of Treasury is expected to issue further guidance on documentation and employer reporting obligations closer to implementation.  In the meantime, to the extent systems are not already in place, employers should ensure accurate tracking and reporting of tip income to maintain compliance with both state and federal requirements.  Payroll and timekeeping systems may need to be reconfigured to properly identify and categorize “qualified” tip earnings under the new law.  In addition, employers are encouraged to provide training for managers and tipped employees on updated reporting procedures and to reinforce how unreported tips could affect both tax treatment and employee eligibility for the state income tax exemption.

Overtime Pay Deduction

The law also provides a state income tax exemption for overtime pay earned for hours worked beyond 40 in a workweek. This exemption applies only to the premium portion of overtime pay, meaning employers should verify that their payroll systems accurately distinguish base wages from overtime premiums for tax-reporting purposes.

Next Steps

The exemptions for tips and overtime are scheduled to expire after the 2028 calendar year unless extended by future legislation. Employers should begin preparing well ahead of the 2026 implementation date by:

1. Auditing payroll systems to identify and correctly flag tipped and overtime income.
2. Updating employee handbooks and wage policies to reflect new reporting requirements.
3. Coordinating with payroll providers or accountants to ensure systems are ready for Michigan’s exemption structure.
4. Training management and HR personnel on proper tip pooling, timekeeping, and reporting practices.

Key Takeaways for Employers

With implementation on the horizon, employers should begin aligning payroll, HR, and compliance systems with Michigan’s new exemption framework to ensure a smooth transition. For further guidance, please contact one of Honigman’s Labor and Employment Attorneys here.