HB520 would create a new Hawaii income tax exclusion for tips received by employees. The bill adds a section to chapter 235, Hawaii Revised Statutes, providing that tips included on the employee’s statements furnished to the employer for federal payroll tax purposes would be excluded from gross income, adjusted gross income, and taxable income. The measure defines “tips” as gratuities or voluntary monetary contributions from customers and defines a “tipped employee” as someone in an occupation receiving more than $30 per month in gratuities.
The bill also directs the director of taxation to prepare necessary forms, may require proof from taxpayers, and adopt administrative rules to implement the exclusion. The exclusion would apply beginning with taxable years after December 31, 2025, so it would not affect prior tax years. The stated policy rationale is to align with a growing federal movement to exempt tips from taxation and to help local small businesses attract and retain qualified workers.
Impact
HB520 would amend Hawaii’s tax code by adding a new tip-specific exclusion to chapter 235, reducing taxable income for employees who receive reported tips and lowering state income tax liability for those workers. It would also create administrative responsibilities for the Department of Taxation, including form preparation, evidence collection, and rulemaking. Employers and tipped workers in hospitality, food service, and other tipped occupations would be the primary affected parties, while the state would forgo some income tax revenue from tip income.
Sentiment
The bill appears generally favorable in concept, based on its introduction by the Small Business Caucus and its stated purpose of helping employers attract qualified employees. The available record shows no committee testimony, amendments, or votes, so there is no documented opposition or support beyond the bill’s framing. Its referral to LAB and FIN suggests it was still in the early committee process when the available record ended.
Contention
The main potential points of contention are fiscal and administrative. Opponents could question the revenue loss from excluding tip income from taxation and whether the exemption would create inequities between tipped and non-tipped workers. There may also be concern about verification and compliance, since the Department of Taxation would need to determine which amounts qualify as tips and whether they were properly reported to employers under federal payroll rules. Supporters, by contrast, are likely to emphasize workforce recruitment, small business competitiveness, and consistency with federal tax policy trends.