No Tax on Overtime, Tips Changed in Senate Bill: What To Know

Newsweek

8 hours ago

Based on facts, either observed and verified firsthand by the reporter, or reported and verified from knowledgeable sources.
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President Donald Trump's no tax on tips and overtime pay policy was one of his most popular pledges during the 2024 election campaign, and lawmakers in Congress are working to make his plans a reality.
The promise is included in the One Big Beautiful Bill Act, the sprawling budget bill that outlines Trump's economic agenda, which has been amended by Senate lawmakers this week.
While the total removal of these income tax requirements is not on the table, Republicans have proposed letting workers deduct their reported tip and overtime income from their federal income taxes—with the House and Senate considering slightly different ways of implementing the policies.
Why It Matters
Nixing federal income taxes on overtime and tipped income was one of Trump's top policy promises during his 2024 election campaign, an idea that has also been embraced by Democrats. It could affect millions of workers across the U.S.
What To Know
The Senate Finance Committee's proposal would limit tax breaks on tipped income and overtime pay. The House version allowed deductions on income up to $160,000 annually.
The Senate plan offers the same $25,000 deduction, but would begin to phase out for single filers earning, with a modified adjusted gross income, $150,000, and couples over $300,000.
The list of occupations that will be permitted to deduct tips from their federal income taxes would need to be published within 90 days of the rule becoming law: it is expected to include most service workers.
Stock image of money and a receipt on a restaurant table.
Stock image of money and a receipt on a restaurant table.
GETTY
For overtime pay, Senate Republicans also propose a $12,500 deduction for single filers, doubled to $25,000 for joint tax returns. This would also phase out at the same levels as the tips policy.
Both plans would still be subject to FICA taxes, which pay for Social Security and Medicare, and both would be in place from 2025 to 2028.
What People Are Saying
Javier Palomarez, founder and CEO of the United States Hispanic Business Council, told Newsweek the policy could "unintentionally amplify tipping fatigue."
"If consumers perceive that service workers are receiving an additional government benefit, they may become less inclined to tip, or tip less, especially amid growing backlash to the seemingly common tipping prompts, e.g., at counter-service or self-checkout. Consumers' mindsets could shift, viewing the policy as a substitute for their personal responsibility to tip generously."
Republican Mike Crapo, Idaho Senator and U.S. Senate Finance Committee chairman, said the bill "delivers additional tax relief to middle-class families still recovering from record inflation under the [Joe] Biden administration.
"It powers the economy by permanently extending critical pro-growth provisions and introduces new incentives for domestic investment, providing certainty for American job creators to spur domestic economic activity and invest in their workers."
The University of Colorado's Nicole Lazzeri, a teaching assistant professor of accounting at the Leeds School of Business, told CU Boulder Today: "When you look under the hood, it gets a little more complicated. The current version of this proposal—the one included in what's been dubbed the "Big, Beautiful Bill"—doesn't actually remove all taxes on tips.
"It lets workers deduct their reported tip income from their federal income taxes, but tips would still be subject to payroll taxes—that's Social Security and Medicare, the 7.65 percent that's taken out of every paycheck. So yes, it would help some workers. But not as much as it might seem.
What Happens Next
If enacted, the changes would take effect from 2026 through 2028. The modified bill will first be debated by the Senate and return to the House for a final vote before Trump can sign it into law.