How GOP bill's new tax rules for tips and overtime could impact you

Yahoo

23-05-2025

The massive Republican-backed budget bill — called "one big, beautiful bill" by President Trump — includes several new tax rules that could have a big financial impact on millions of workers who earn tips or overtime pay.
While the heart of the bill is an extension of Mr. Trump's 2017 tax cuts, the legislation also includes several provisions that were part of the president's campaign last year, such as his vow to eliminate taxes on tipped income.
The bill could deliver savings of about $1,700 for each tipped worker as well as employees who earn overtime, the House Ways and Means Committee said on May 20. But there are some restrictions in the bill that could limit the financial boon for these workers, with some policy experts saying that the tax breaks may not be as useful as they first appear.
For instance, almost 4 in 10 tipped workers earn so little that they pay no federal income tax, according to the Brookings Institution. Consequently, the tax break is likely to provide a bigger helping hand to higher-paid tipped workers, while leaving some low-income workers behind.
"If your goal is to help the poorest service workers, this is probably not the way to do it," said Michael Lynn, a professor of services marketing at Cornell University whose research largely focuses on tipping and other consumer behavior.
The 1,100-page bill, which squeaked through the House on Thursday by a single vote, will now go to the Senate, where more changes are likely. Here's what to know about the provisions as they now stand.
How would the "No Tax on Tips" provision work?
Called the "No Tax on Tips" provision within the House bill, the rule would create a new tax deduction that eliminates federal income taxes on tips for people who work in jobs that have traditionally received them.
There are about 4 million people in the U.S. who work in tipped occupations, or about 2.5% of all U.S. workers, according to the Yale Budget Lab.
The tax break includes some restrictions:
Only those who earn less than $160,000 in 2025 would qualify. Only workers with Social Security numbers can qualify, and if they are married, their spouse must also have a Social Security number.Tips must be reported to the employer and included on the worker's W-2 tax form.The provision would go into effect in 2025, but expire after 2028, making it a short-term tax break. The deduction would only apply to certain jobs: The Trump administration must publish a list of occupations that qualify for the provision within 90 days of the bill's passage.
"The tip exemption will significantly increase take-home pay for most tipped workers, many of whom are low- to middle-income taxpayers," the White House's Council of Economic Advisers (CEA), a group that advises the president on economic issues, said in a report published earlier this month.
The CEA's report estimates that the average take-home pay for tipped workers would increase by $1,675 per year under the provision.
Would it help all tipped workers?
No, because 4 in 10 tipped workers earn too little to pay federal income taxes, which means they wouldn't see any benefit. There's also a concern that some employers could reclassify some workers as tipped workers by arguing they would receive a tax break, according to Brookings.
The minimum wage for tipped workers is $2.13 per hour, versus $7.25 an hour for non-tipped workers.
One Fair Wage, an advocacy group representing service workers, criticized the measure, noting that the GOP bill also includes cuts to social safety net programs that many tipped workers rely on. "It also slashes Medicaid, putting 1.2 million restaurant workers at risk of losing health care," One Fair Wage posted on social media.
What about the Senate's No Tax on Tips Act?
A separate, standalone bill called the No Tax on Tips Act, which is solely focused on giving a tax break to tipped workers, was passed by the Senate on May 20, with bipartisan support. That bill will now move to the House for a vote.
The Senate bill offers similar benefits and restrictions as the "one big, beautiful bill" when it comes to taxes and tips, but with one major difference: The bigger GOP bill requires workers, as well as their spouses, to have a Social Security number.
That requirement appears to be aimed at excluding some immigrants from tapping the tax break, while the Senate bill doesn't stipulate that taxpayers who claim this break, or their spouses, must have a Social Security number.
Senator Jackie Rosen, a Democrat from Nevada, urged lawmakers to pass the Not Tax on Tips Act arguing in a statement that the bigger GOP bill combines the tax break with cuts to vital programs like Medicaid and food stamps.
"We shouldn't be forcing working families to choose between keeping their health care or keeping their tips, which is why we want this bipartisan bill on its own — on its own — not part of a harmful, extreme budget bill," Rosen said on the Senate floor on Wednesday.
How does the "No Tax on Overtime" provision work?
The GOP bill includes a tax break for workers who receive overtime, another one of Mr. Trump's campaign promises.
About 8% of hourly workers and 4% of salaried workers receive overtime pay on a regular basis, according to the Yale Budget Lab. About 70% of salaried workers don't qualify for overtime pay, it noted.
The legislation would enable workers to claim a deduction on their taxes for the amount they earned in overtime pay during the tax year, although there are some restrictions:
Workers would need a Social Security number to claim the tax break, and if married, their spouses would also need a Social Security number.The tax break would go into effect in 2025 but expire after the 2028 tax year.
But more guidelines about the provision would still need to be determined by the Treasury Department, according to tax firm Wolters Kluwer in a May 22 publication about the tax bill.
The average overtime worker would see a tax cut between $1,400 to $1,750 per year through the new break, according to the Council of Economic Advisers.
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