Personal income taxes: unemployment insurance: tips.
The bill is expected to alleviate the tax burden on thousands of employees who rely on gratuities, thereby allowing them to retain more of their earnings. Furthermore, by excluding tips from the calculation of wages for income tax withholding as well as for unemployment insurance purposes, SB17 provides clear financial advantages to tipped workers. This could lead to an enhanced disposable income for these individuals, positively affecting local economies, particularly in sectors like dining, hospitality, and personal services which heavily depend on tip-based income.
Senate Bill No. 17 (SB17), introduced by Senators Ochoa Bogh, Grove, and Valladares, aims to modify California's Personal Income Tax Law and the Unemployment Insurance Code specifically concerning tips received by employees. Effective for taxable years beginning on or after January 1, 2026, the bill proposes to exclude tips from being counted as gross income. This significant change means that employees who receive tips will have a larger portion of their earnings untaxed under the state's personal income tax, potentially benefiting many workers in the service industry and others who rely on tips as a substantial part of their income.
While SB17 primarily aims to support low-income workers by allowing them to keep more of their earnings, it is not without its points of contention. Critics might argue that this could complicate the tax system or lead to potential misuse of the tax code regarding tip reporting and withholding practices. Additionally, the exclusion of tips from wages could affect employer contributions towards unemployment insurance funds, which may raise concerns about the sustainability of these funds. Such discussions emphasize the balance legislators must consider between supporting workers and maintaining a fair tax and social safety net system.