Does Minnesota Tax Your Tips and Overtime in 2026?
Minnesota levies a graduated state income tax reaching 9.85 percent. Understand how state tax conformity rules affect your OBBBA tip and overtime deductions.
Minnesota taxes personal income under a graduated rate structure with a top bracket of 9.85 percent. Whether Minnesota workers keep their federal One Big Beautiful Bill Act (OBBBA) deductions on state tax returns depends on legislative conformity updates enacted by the Minnesota Legislature.
Key takeaways for Minnesota taxpayers
- Minnesota uses federal taxable income as the starting point for state Form M1, but selectively decouples through statutory additions.
- Federal OBBBA deductions remain fully valid on your federal Form 1040 return regardless of state legislative action.
- If Minnesota decouples from OBBBA, taxpayers must add the federal tip and overtime deductions back on Schedule M1M.
- Minnesota has no tip credit, meaning employers must pay tipped employees full minimum wage in addition to customer tips.
- Healthcare, manufacturing, and food service employees should monitor state conformity bills before adjusting state withholding.
How Minnesota tax conformity works
Minnesota is a rolling conformity state with periodic legislative reviews. The Minnesota Department of Revenue administers the individual income tax under Minnesota Statutes Chapter 290. While federal tax returns start with gross income and apply deductions on Schedule 1-A, Minnesota calculates state liability by adopting federal taxable income subject to specific modifications. For a review of conformity models across the country, check our state tax conformity guide.
When Congress enacts major tax deductions like OBBBA, the Minnesota Legislature must decide whether to adopt those changes or require an addition on Form M1. If the legislature does not pass conformity legislation adopting the tip and overtime provisions, filers must report their federal deductions as additions to income on their state returns, paying Minnesota income tax on those amounts.
Federal OBBBA deductions for Minnesota workers
Regardless of state-level conformity debates, your federal tax savings remain protected under federal law. Minnesota nurses, factory workers, restaurant servers, and trade specialists claim their federal deductions directly on Schedule 1-A when submitting Form 1040. Learn the federal claiming procedure in our Schedule 1-A filing guide.
The federal tip deduction allows up to $25,000 in qualifying tips to be excluded from federal adjusted gross income. The federal overtime deduction permits non-exempt hourly employees to deduct the FLSA half-time premium up to $12,500 for single taxpayers or $25,000 for married couples filing jointly.
To see your federal savings and compare state tax impacts, use our OBBBA tax calculator. The calculator models federal tax brackets, state flat or graduated rates, and deduction phaseouts above $150,000.
Minnesota tip credit prohibition and hourly overtime
Minnesota law prohibits employers from taking a tip credit against the state minimum wage. Under Minnesota Statutes Section 177.28, all employers must pay employees at least the full statutory minimum wage, and tips belong entirely to the worker. This contrasts with federal FLSA tip rules, which allow a tip credit in states without protective statutes.
Because Minnesota tipped staff receive full regular wages plus tips, their base hourly income is higher than in tip-credit states. Overtime is calculated on this full base wage. If a hospitality worker in Minneapolis earns $16 per hour and works 48 hours, the overtime rate is $24 per hour. The $8 per hour half-time premium qualifies for the federal OBBBA overtime deduction, while tips qualify under the separate tip deduction.
Filing your Minnesota state return on Form M1
When preparing your annual taxes, review the instructions for Minnesota Form M1 and Schedule M1M. If Minnesota conforms to OBBBA, your federal taxable income automatically incorporates your tip and overtime deductions, reducing your state tax bill by up to 9.85 percent of the deducted amount. If Minnesota decouples, you must enter the deducted amount on the additions line. You can review IRS withholding mechanics in IRS Publication 15.
Workers who adjust federal Form W-4 to increase paycheck size should be cautious about reducing state withholding on Form W-4MN unless the Minnesota Department of Revenue issues formal guidance confirming conformity. Lowering state withholding prematurely can create an unexpected state tax balance when filing Form M1.
Frequently asked questions
Does Minnesota tax tips earned by restaurant staff?
On federal returns, qualifying tips up to $25,000 are deductible under OBBBA. On Minnesota state returns, tips are taxable unless the Minnesota Legislature enacts conformity legislation adopting the federal deduction.
How does Minnesota calculate overtime for non-exempt healthcare workers?
Minnesota follows standard FLSA overtime rules requiring time-and-a-half after 40 hours per week (or an 8/80 hospital schedule). The half-time premium qualifies for the federal OBBBA overtime deduction.
Can I adjust my Minnesota state withholding for OBBBA?
You can adjust federal withholding on Form W-4 immediately. You should only adjust state withholding on Form W-4MN if Minnesota state law confirms full conformity with federal OBBBA deductions.
Where do I report OBBBA deductions on my federal return?
You report tip and overtime deductions on federal Schedule 1-A, lines 1 and 2, which flow into line 10 of Form 1040 to lower adjusted gross income.
This article is general information, not tax advice. Tax rules and payroll reporting require exact records. Consult a qualified CPA, Enrolled Agent, or tax attorney regarding your individual return.