LANSING, Mich. (WZMQ) – Michigan’s new state budget includes temporary tax relief for workers who earn tips or overtime pay. The change mirrors federal exemptions approved earlier this year under what’s known as the “Big Beautiful Bill Act.”
Under the new law, income from tips and overtime will now be exempt from Michigan’s state income tax for tax years 2026 through 2028. Those exemptions were already implemented at the federal level, but state law needed to be updated for Michigan residents to see the same benefits.
“The budget agreement made that law change,” Robert Schneider, Senior Research Associate with the Citizens Research Council of Michigan, explained. “So now the federal tax exemptions for overtime pay and tipped income that those earners will enjoy at the federal level, they also will receive those benefits at the state level.”
The Restaurant and Lodging Association of Michigan gave this statement to WZMQ:
“The Michigan Restaurant & Lodging Association would like to thank legislative leaders for ensuring that no tax on tips was included in the FY 26 budget, recognizing the hard work that servers put in each and every day and rewarding their efforts with more money in their pockets. Hopefully, this will translate as a recruiting tool for owner operators who continue to face workforce shortages.”
The policy is expected to cost the state roughly $670 million per year while it’s in effect.
For tipped workers, the law exempts up to $25,000 in tipped income per year, though actual savings will depend on an individual’s total income and tax bracket. Overtime workers can exempt up to $12,500 in additional pay.
The exemptions will require additional recordkeeping for employers, especially in the hospitality industry. Only voluntary tips will qualify, meaning mandatory gratuities added to large restaurant bills will still be taxed.
The new budget also includes changes for retirees, offering targeted tax credits for seniors receiving Social Security rather than a full exemption.
Officials say these adjustments are temporary and will expire after three years unless extended by lawmakers.
