Summary:

 Senate Bill 285 (SB 285) exempts tips received by employees from state income tax, removing the requirement to include tip income in net taxable income for New Mexico tax purposes. The bill applies to taxable years beginning on or after January 1, 2025. 

Legislation Overview:

 Senate Bill 285 (SB 285) enacts a new section of the Income Tax Act, allowing New Mexico residents who receive tips as part of their compensation to exclude that income from state taxation. Under this provision, tips received for services rendered, whether directly from customers or pooled through an employer, will not be counted as taxable income.

This exemption applies regardless of whether tips are received in cash, included in credit card payments, or distributed through an employer’s payroll system. The bill does not alter federal income tax obligations, meaning that while tips will be exempt from state income tax, they remain subject to federal tax requirements.

The bill takes effect for taxable years beginning on or after January 1, 2025.

Implications
SB 285 provides direct tax relief to tipped workers, reducing their state income tax liability and increasing their take-home earnings. This exemption may benefit workers in the restaurant, hospitality, and service industries, where tipped wages make up a significant portion of total compensation. The bill also simplifies tax filing for workers, as they will no longer need to track or report tips for state income tax purposes.

The exemption will reduce state income tax revenue, particularly in sectors with high concentrations of tipped employees. The fiscal impact will depend on the total amount of tips earned by workers statewide and the number of employees benefiting from the exemption. While the measure provides financial relief to low-wage workers, it may also reduce available funds for state programs reliant on income tax revenue.

Employers may still be required to report tip income to the federal government, creating a discrepancy between federal and state tax reporting. The bill does not alter employer responsibilities related to payroll taxes, Social Security, or Medicare contributions on tipped income, meaning that businesses will still be required to withhold and pay certain federal taxes on tips. 

Current Law:

 Under current law, all tips received by employees are subject to New Mexico state income tax and must be reported as part of net taxable income. SB 285 removes state taxation on tips, aligning New Mexico with states that have implemented similar tip income exemptions.