President Donald Trump has renewed his call for tax cuts, including eliminating taxes on overtime pay and tips. Speaking to Congress, he urged lawmakers to support what he described as much-needed relief for workers.
His proposal has sparked discussions about its feasibility, economic impact, and potential consequences for both employees and government revenues.
During his address, Trump declared: “I’m calling for no tax on tips, no tax on overtime, and no tax on Social Security benefits for our great seniors.”
He positioned the plan as part of his broader tax strategy aimed at easing the financial burden on workers and retirees, particularly in light of inflation concerns.
How Do Taxes on Overtime Work?
Under U.S. tax law, overtime pay is treated as regular income and is subject to federal and state taxes. The Fair Labor Standards Act (FLSA) mandates that non-exempt employees working more than 40 hours per week receive at least 1.5 times their hourly wage. These earnings, however, remain fully taxable under existing IRS guidelines.
Trump’s plan proposes making overtime pay tax-free, allowing workers to keep more of their earnings. He argued that this change would incentivize employees to take on extra hours without the concern of additional tax burdens.
“The people who work overtime are among the hardest working citizens in our country and for too long, no one in Washington has been looking out for them,” Trump said during a campaign rally in September 2024.
How Are Tips Taxed?
Under current IRS rules, tips are considered taxable income. Employees who earn more than $20 in tips per month must report them, and employers are required to withhold income and payroll taxes accordingly (IRS). Both employees and employers pay their respective portions of Social Security and Medicare taxes on reported tips.
Trump initially proposed removing federal taxes on tips in June 2024, claiming he got the idea from a waitress at his Las Vegas hotel. “To those hotel workers and people who get tips, you are going to be very happy, because when I get to the office, we are going to not charge taxes on tips, people making tips… We’re going to do that right away, first thing in the office,” Trump said at the time.
Supporters of the plan argue that tipped workers—who often earn below the standard minimum wage—would benefit significantly from keeping more of their earnings. Critics, however, warn that exempting tips from taxation could create loopholes that may lead to wage restructuring, potentially benefiting employers rather than employees.
Economic analysts estimate that eliminating taxes on overtime pay alone could reduce government revenue by anywhere from $250 billion to $1.4 trillion over the next decade. If the exemption extends to all workers eligible for the tax cut, the loss in revenue could be as high as $5 trillion.
What’s Next
While the U.S. House of Representatives has approved a budget resolution in line with Trump’s tax priorities, the measure does not yet contain specific policy language eliminating taxes on overtime or tips.
The resolution serves as a general guideline rather than binding legislation, which “does not provide funding for federal programs or change tax law”, according to the Congressional Budget Office. Senate Republicans have also expressed concerns over the proposal, particularly regarding its impact on government revenues and entitlement programs.
Experts remain divided on the long-term effects of the plan. Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, told Newsweek that a tax-free overtime policy wouldn’t just appeal to workers earning extra income—it could also become a strategic tool for employers, helping them incentivize overtime work among their staff.
“The only question will be if Congress will be as enthusiastic to the proposal, especially at a time when more focus is being given to the national debt,” Beene said.
For now, Trump’s plan remains a campaign proposal awaiting legislative action. Whether Congress will take up the initiative—and how it would be implemented—remains uncertain.
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