State Lawmakers Advance Plan to Eliminate Taxes on Tips

Thousands of Wisconsin service workers rely on tips to make a living. A new proposal is moving through the State Capitol, and it could mean more money stays in their pockets.

The Assembly and Senate have both approved legislation that would eliminate state income taxes on tips along with certain overtime pay from 2025 through 2028. The bill would allow eligible workers to deduct up to $25,000 in tips from their state income taxes. And even as state lawmakers advance the plan, it has not yet been signed by Governor Tony Evers.

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Listen to the entire discussion here:

Wisconsin Restaurant Association President and CEO Kristine Hillmer joins Jamie Martinson and Brian Noonan, hosts of Civic Media Mornings, to discuss how the measure could have a significant impact for those working in the restaurant industry.

“We estimate about 90,000 servers and bartenders would benefit from this,” Hillmer says. “Any time you don’t have to pay taxes on something, it puts money back in your pocket.”

The deduction would apply to all voluntary tips under this proposal and includes both cash and credit card. It would not include automatic gratuities. 

However, the change would also not result in immediate relief. 

Workers would see the benefit when filing their taxes, potentially beginning with returns filed in 2026 for the 2025 tax year.

“This is a deduction, not an exemption,” Hillmer explains. “You still report the income. The benefit comes when you file your taxes.”

The bill mirrors similar efforts at the federal level and includes a sunset provision, applying from January 1, 2025, through the end of 2028. If signed, the Department of Revenue would still need time to finalize rules and update tax software, meaning some workers may need to file amended returns.

Governor Evers has not indicated whether he will sign the bill. Hillmer says concerns have been raised about the measure primarily benefiting “front-of-the-house” workers, leaving out kitchen staff and other employees.

“That’s a concern we share,” she says. “But if we can give 90,000 people a tax break, we’re going to fight for that.”

The legislation comes as restaurants continue to face rising costs and narrow profit margins. Hillmer notes expenses for restaurant operators have increased roughly 40 percent the past five years. She also says profit margins which were already slim before the pandemic — remain under pressure.

“Eating out is discretionary income,” she shares. “When people’s budgets get squeezed, they go out less. That makes running a restaurant even harder.”

Hillmer believes the proposed tax break could also help with ongoing staffing challenges by making service industry jobs more attractive, especially for part-time workers, students, and those supplementing household income.

Yet even with rising menu prices and changing consumer habits, Hillmer says the traditional tipping system remains popular among workers.

“Ninety percent of tipped employees want to keep the system,” she explains. “Moving to a flat hourly wage would likely reduce their overall compensation.”

As lawmakers await the governor’s decision, Hillmer encourages Wisconsinites to support their local restaurants — particularly independent establishments — during what is traditionally one of the slower times of the year.

“It’s tough,” she says. “If you can, go out, support your local restaurant, and tip your server. It makes a real difference.”