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Tip tax: Montanans earning tips will soon be required to report them on state taxes

Tip jar at Stella's Kitchen & Bakery
Posted at 11:48 AM, Feb 05, 2024

BILLINGS — As W-2 forms flood mailboxes across the country and tax day approaches, a senate bill aimed at reshaping Montana’s income tax system is leaving service industry workers worried about their financial futures.

Senate Bill 399 was passed in 2021 but went into effect on Jan. 1, 2024. It will require tips to be reported alongside state taxes, on top of other changes to the system.

"Anytime we do something, we tip,” said Steve Wahrlich, the owner of Stella's Kitchen & Bakery, on Saturday. "Staying in a hotel, we tip the room attendants. If you’re out, you tip your bartender. You tip your waitress. Most people do it."

Steve Wahrlich
Steve Wahrlich

In the service industry, workers oftentimes rely on tips to get by.

"The tips are, like, the main reason I work here,” said John Wand, a server at Stella's, on Saturday.

SB399 has left workers like Wand feeling concerned.

“I might have to get another job now, I guess,” Wand, a service industry worker of around 30 years, said.

The bill was introduced in 2021 by Sen. Greg Hertz, R-Polson.

"Tip income has always been taxable on the federal return. And then in Montana, we’ve excluded it," Hertz said in a recent interview with MTN News. "Now it will be taxed in Montana."

Greg Hertz in 2021
Greg Hertz in 2021

Hertz said it's an attempt at leveling the playing field.

"If you’re working at the same facility and you are an employee who does not get tips, yet the employee next to you is getting tips, that employee is not paying taxes on maybe a half, or a third, of their income. That’s not fair to the other employees. Taxes should just be broad-based and fair to everybody,” Hertz said. "It’s just a matter of fairness."

Senate Bill 399 encompasses a few changes to the system.

"We follow federal standard deductions. The federal levels in 2024 will be $15,000 for a single person and $30,000 approximately for a married couple. So what that means is, that first 15 or 30,000 dollars of income is not taxable at all in Montana anymore. And those levels were a lot lower in 2023...That’s where a lot of people are going to save on income taxes in Montana with this bill,” Hertz explained. "The bill does eliminate up to...100,000 individuals who will no longer have to pay taxes in Montana. And those are primarily low-income taxpayers. The bill also dropped the top tax rate in Montana down to 6.5%."

While the changes won’t be reflected until tax season in 2025 when 2024 taxes are due, service workers like Wand are scrambling to figure out their financial futures.

"I just love working at Stella’s," Wand said. "But I might have to get another job now that I hear that."

John Wand
John Wand

Wand says he’s frustrated by the change, stating Stella's employees who earn tips have always shared with non-tipped employees.

"How is that not fair? We actually tip out the kitchen," Wand said. "We do share our tips."

Stella’s is a part of the Clock Tower Inn, located at 2511 1st Ave N. Wahrlich is the owner of both Stella's and the Clock Tower Inn—and spoke to the tip-pooling system he requires.

Stella's sign
Stella's sign

"Our servers pay into a tip pool, which then is distributed to all of our non-tipped employees. And those are all taxed,” Wahrlich said.

According to Montana Free Press, Montana’s top-bracket tax rate is 5.9%, meaning service workers will owe an additional $5.90 in state taxes for every $100 of tip income they report. Around 22,000 Montana taxpayers reported a combined $105.4 million in exempt tipped income in 2021. If that income was taxed at 5.9%, each taxpayer would have paid $279 more.

"We talk about $5 on $100 worth of tips. (That's) probably anywhere (between) $20-80 a pay period," Wahrlich said. "Which quite honestly, is a lot of money."

Hertz argues the changes from SB399 will benefit Montana taxpayers and help them save money.

“A lot of individuals are struggling right now. I mean, the price of rent, food, and fuel, (those are) major cost contributors to everybody. And what we’re trying to do in Helena is reduce your taxes," Hertz said. "So you’ll have a little bit more money to help you just get through life and pay the bills. I know a lot of people are talking about, they think the economy’s good. But quite frankly, if you’ve been down to your grocery store lately, you know grocery prices have gone up significantly. And even though inflation has slowed down, those prices are not coming down."

Tip jar at Stella's Kitchen & Bakery
Tip jar at Stella's Kitchen & Bakery

To learn more about the passage of Senate Bill 399, click here.

To learn more about the changes coming to Montana's income tax structure, click here.

To learn more about Stella's Kitchen & Bakery, click here.

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