Soon, tips received by Montanans will have to be reported on state taxes

Billings, Montana – Concerns about their financial futures are being raised by a senate measure that aims to change Montana’s income tax structure, just as W-2 forms are flooding mailboxes throughout the nation and tax day draws near.

Despite being passed in 2021, Senate Bill 399 became operative on January 1, 2024. In addition to other systemic changes, it will mandate that tips be declared simultaneously with state taxes.

“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.”

Employees in the service sector sometimes depend on gratuities to make ends meet.

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

SB399 has caused alarm for employees such as Wand.

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

Sen. Greg Hertz, a Republican from Polk County, introduced the bill in 2021.

“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.”

According to Hertz, it’s an effort to level 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 modifies the system in a few ways.

“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%.”

Even though the adjustments won’t take effect until the 2025 tax season, when 2024 taxes are due, service employees like Wand are rushing to make financial plans for the future.

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

Wand expresses his frustration with the change, claiming that tip-earning Stella’s employees have traditionally shared with non-tip employees.

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

Wahrlich is the proprietor of both Stella’s and the Clock Tower Inn, which is situated at 2511 1st Ave N. He discussed the need for a tip-pooling system.

“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.

Service employees in Montana will owe an extra $5.90 in state taxes for each $100 of tip revenue they disclose, as the top bracket tax rate in the state is 5.9%, according to Montana Free Press. In 2021, around 22,000 Montana taxpayers reported exempt tipped income totaling $105.4 million. A 5.9% tax rate on that income would have resulted in $279 higher payments for each person.

“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 contends that the modifications made to SB399 will save money and benefit Montanan taxpayers.

“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.”