Governor Whitmer signed a new law this week that will allow Michigan tipped workers to take a deduction for tip income and the broader group of non-exempt and hourly workers to deduct overtime pay from taxes. H.B. 4961 provides for personal income tax deductions for qualified tips and qualified overtime compensation. This tip deduction from state taxes will apply for three years from 2026 through 2028. Additionally, Social Security recipients in Michigan will not pay tax on their social security.

This means that the state will not apply its 4.25% state tax on income from tips, overtime, and social security. It is estimated that the tip tax deduction will save covered workers an average of $400 a year if, as estimated by the National Law Project, they would have reported $9,400 in tips each year. The exemption on overtime pay would save up to 500,000 Michigan workers an average of $500 each year.

As estimated, 40,000 Michigan retirees receiving Social Security payments could save about $500/year in addition to the $20,000 per tax payor deduction on all retirement income if the taxpayer is older than 67 years of age. This Michigan Social Security tax deduction is not in the federal One Big Beautiful Bill Act that Trump passed federally.

Analysts estimate this will cost the state about $158 million in revenue. But don’t fret. The new law is reported to increase the gas tax at the pump $.20 cents per gallon and puts a new 24% wholesale tax on marijuana.

This follows the IRS rules issued last month on the federal side of “no tax on tips and overtime” that lists those jobs that are eligible for the “no tax on tips” deduction. These are “occupations that customarily and regularly received tips.” The IRS listed eight occupational categories that would qualify for the federal tax deduction.

Those occupational categories are 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 further qualify for the tax deduction, businesses will need to track and report qualified tip income. Workers will have to adjust how and when they report tips. It is recommended employers get training for themselves and their staff on these changes to payroll tax law.

Sources: Law360 Employment Authority. Michigan To Allow Tax Deductions For Tips, OT Pay (10/9/2025); Bridge Michigan. Michigan Taxes on Tips, Overtime, Social Security to End for Three Years. (10/9/25); VedderPrice IRS Publishes Proposed Regulations for the “No Tax on Tips’ Provision of the OBBBA (10/8/2025) /Treasury Department Issues List of Jobs Qualifying for New Tip Income Deductions Under “One Big Beautiful Bill” Act (9/10/25)