Among the numerous adjustments to Montana’s income tax framework that came into effect at the onset of the new year is a provision subjecting tip income to state taxes.
This modification aligns Montana’s taxation approach with the federal system, where tips have traditionally been taxed in conjunction with salaries and wages. Consequently, numerous workers in the service sector may find their state income tax liabilities increasing by several hundred dollars annually.
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The alteration was enacted by the 2021 Legislature through Senate Bill 399, an extensive reform initiative that revamped various aspects of Montana’s income tax structure. This encompassed the repeal of diverse tax credits and the consolidation of the state system into just two income tax brackets. Several provisions of the bill, including the adjustment to tipped income, only became effective at the start of the current year.
Montana’s highest tax rate, applicable to annual taxable incomes surpassing $20,500, is currently 5.9%. This implies that many service sector employees will be required to pay an additional $5.90 in state taxes for every $100 of tip income disclosed in their tax filings.
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As per the Montana Department of Revenue, approximately 22,300 taxpayers in Montana disclosed a combined $105.4 million in exempted tipped income for the year 2021. If this income had been subjected to a 5.9% tax rate, these taxpayers would have collectively contributed an additional $6.2 million in taxes. On average, each taxpayer would have faced an increased tax burden of $279.
During the Senate floor debate on the bill in April 2021, Senator Greg Hertz, the sponsor of the bill and a Republican from Polson, contended that it is inequitable to allow certain individuals, such as waiters and waitresses, to take home their tip earnings without paying state income taxes, while their colleagues who receive wages must pay taxes.
Hertz stated, “It’s just not fair — it makes no sense for these individuals to not have to pay their fair share of taxes on just a particular type of income that they get.” Democrats, however, advocated to retain the exemption, arguing that it is unjust to increase taxes on workers who are often struggling to make ends meet.
Then-Senate Minority Leader Jill Cohenour, a Democrat from East Helena, remarked, “We’re talking about our lowest-income Montanans here.”
The overarching bill, characterized by Hertz as an attempt to simplify the process of filing Montana income taxes by aligning state and federal tax codes, ultimately gained approval from a majority of Republicans and faced opposition from most Democrats.
Montana stands among the seven states that do not credit tip income against their minimum wage, according to the Pew Research Center. This means that restaurants and other service businesses cannot pay tipped workers less than the minimum wage, even if tips compensate for the difference. Despite the competitive labor market pressuring many employers to exceed the minimum wage in recent years, Montana’s current legal minimum wage stands at $10.30 per hour.