Work Overtime? You May Soon Get a Tax Cut
When President Trump first floated the idea of 'no tax on overtime' at a campaign rally last year, he did not elaborate on how it would work. Could anyone who works more than 40 hours a week claim a tax break? Would overtime pay really be completely tax-free?
The answer to both questions, as it turns out, is no.
Under the sprawling domestic policy bill that Republicans pushed through the House and are preparing to steer through the Senate, the tax break would be limited. It would be available only to Americans who, under federal law, must be paid at a time-and-a-half rate for working any time exceeding 40 hours in a week. That's a broad group that includes almost all Americans who are paid an hourly wage, but many salaried workers would not be eligible.
And the tax relief would not be total. Americans would still owe payroll taxes, and potentially state income taxes, on their overtime pay. Federal income taxes would be eliminated on those wages, but only on the earnings attributable to the 50-percent bump in pay — only a third of the money made while working overtime.
Even with those limitations, both critics and supporters of the idea believe the tax break could reshape the American labor market. The White House Council of Economic Advisers expects that the policy will motivate Americans to work more and help strengthen the economy.
Skeptics think the change would primarily drive people to reclassify their earnings or even change jobs in order to file for overtime. They worry that if enough people sought jobs that offer overtime, wages in those positions could eventually fall.
'Ultimately, it's going to create unintended consequences that incentivize certain behaviors in the labor market and thus create winners and losers from that,' said Emmet Bowling, a labor policy analyst at the American Action Forum, a conservative think tank. 'Hourly jobs might become more desirable because of this tax deduction.'
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