No tax on tips and overtime legislation is advancing but has not yet been fully passed into federal law. Multiple states are pushing related measures as Congress debates broader changes.
By Brad Nakase, Attorney
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One of Donald Trump’s campaign slogans and campaign pledges for his 2024 run for president was “no tax on overtime and tips.” Naturally, many people now want to know: Did the no tax on tips and overtime bill pass?
Many months after the election’s outcome and inauguration, there is still much disagreement over it. Proponents point to the likely financial impact on US employees (and employers), while critics point to the possibility of adding billions of dollars to the national debt and the ensuing complexity of the tax system.
The purpose of this article is to provide you with information, analysis, and comments on the overtime and tips aspects of federal legislation on this subject.
The present and impending federal budget design and approval process reflects President Trump’s efforts to reduce taxes on overtime payments for nonexempt/hourly workers and on tips paid to specific U.S. workers.
The Republican budgetary resolution, which asks for $2 trillion in government spending cuts over ten years and $4.5 trillion in reductions in taxes, was narrowly approved by the United States House of Representatives on February 25. Four days prior, on February 21, Senate Republicans approved a budget plan for a limited package that addressed defense and border enforcement, opting to address tax policy in another bill sometime this year.
The Overtime Compensation Tax Relief Act and the No Tax on Tips Act are two proposals that Congressmen have prepared to mobilize Trump’s objectives as the budget procedure continues.
So, did the no-tax on tips and overtime bill pass yet? Not fully — legislation is moving, but full passage has not occurred.
Vern Buchanon, a Republican from Florida, and 14 other co-sponsors—13 Republicans and one Democrat, Steven Horsford of Nevada—introduced the No Tax on Tips Act to the House of Representatives on January 16. Additionally, on January 16, the Senate version was introduced, with 8 senators (two Democrats and six Republicans) cosponsoring it and Ted Cruz (Texas) serving as its sponsor.
If approved, this law would allow some taxpayers to get a full deduction for tipped wages at the time of filing, exempting “cash tips”—which can take the shape of cash, debit and credit cards, and checks—from federal income tax. To guarantee that only conventionally tipped staff will profit, the legislation contains safeguards.
A tipped worker is defined by the FLSA (Fair Labor Standards Act) as an individual who “participates in a job in which she or he ordinarily and regularly gets over thirty dollars a month in tips.” Food and beverage servers, bartenders, baristas, drivers for ride-sharing services, hair stylists, delivery drivers, nail technicians, valets, personal trainers, tour guides, bellhops, caddies, and casino operators are among the occupations that are usually deemed to qualify for tips. The Budget Lab of Yale University estimated that there are about 4 million employees in tipped professions in the United States.
So, did the no-tax on tips and overtime bill pass in this case? As of now, it has strong momentum but still awaits final approval. The bill was praised by several industry groupings.
According to Sean Kennedy, the National Restaurant Association’s executive vice president (public affairs), “removing tip taxes would help restaurant operators hire more workers in the sector and put money back into the pockets of many employees in the restaurant and foodservice sectors. This Act is reasonable legislation that benefits our employees while being improved and protected to make it more cost-effective.”
“We greatly appreciate efforts to help the 1.3 million registered beauty professionals & the employers who maintain this critical business across the United States,” stated Nina Daily, executive director (of the Professional Beauty Association), which is the second-highest tipped industry after restaurants. Our country’s tax ideas are based on promoting workers and ensuring tax equity across all industries.
According to the International Franchise Association’s chief advocacy officer Michael Layman, “This idea benefits both employees and small-company owners. With this federal wage credit, many of the 9 million employees and 830,000 franchises we represent will profit. We value this endeavor to level up the competition for entrepreneurs on Main Street around the country and equalize tipped workers across industries.”
While the majority of Republican (and certain Democratic) lawmakers in Congress favor lowering or doing away with tip taxes from a political standpoint, some economists think that doing so would do more harm than good because it would increase the deficit in the federal budget and make Americans less inclined to tip employees.
While people ask, did the no tax on tips and overtime bill pass at the national level, many states aren’t waiting. Republican lawmakers in numerous states have shown their support for Trump and the “no tax on tips” stance by initiating and/or pushing relevant measures as all of this is unfolding at the national level. During the previous few months, 23 states had submitted 40 different pieces of bills.
Trump promised to remove overtime pay taxes during a campaign appearance in Tucson, Arizona, on September 12, 2024, claiming that doing so would benefit American workers financially and give more people “a motivation to work.”
“Those who put in extra hours are some of the most diligent people in our nation, and for far too long, nobody in Washington was watching out for them,” he said during the rally.
If you’re wondering, did the no tax on tips and overtime bill pass to cover overtime yet? No — although state-level momentum is building and discussions are active in Congress.
On January 20, Don Bacon, a Republican from Nebraska, sponsored the Overtime Pay Relief Act in the House of Representatives and forwarded it to the Committee on Ways and Means. According to Bacon, “The public made it obvious last Nov that they sincerely want something done to ease their financial difficulty.” “This legislation is a positive beginning step.” A Senate form of this bill does not yet exist.
According to a Tax Foundation report from last fall, maintaining existing overtime ratios over a ten-year period would result in almost $5.7 trillion in premium and overtime compensation. On average, this remuneration is taxed with a marginal tax rate of twelve percent, according to its overtime studies. On average, overtime compensation is subject to an 18% marginal income tax rate for its upper-bound estimations.
The Tax Foundation’s VP of federal tax policy, Erica York, and Garrett Watson (policy analysis director) pointed out some sensitive issues with the national “no tax on overtime” legislation in a blog post.
They stated that Trump’s other suggested exemptions involving tips & Social Security, both of which are already subjected to certain tax reporting specifications, are simpler than the suggestion to exempt overtime. “On the contrary, allowing a portion of paychecks to be exempted based on hours worked creates a completely new division in the tax rules, necessitating new administrative procedures and extra reporting of hours, probably from employers & employees.”
According to a Reuters analysis of four top budget analysts, any proposed reductions in overtime pay, along with associated new reductions in tips & Social Security benefits, coupled with the tax cuts Trump intends to reinstate from his first term in office, could take primary U.S. deficits to $6.6 trillion over the course of the next ten years.
“It’s crazy,” stated Thomas Massie (Republican from Kentucky), serving in the House of Representatives. “With this, we will raise the deficit. If I were voting for that, why? It is impossible to reduce taxes without reducing spending, yet they aren’t actually doing so.”
However, some people think that such a proposition has value. According to Alex Beene, a financial literacy lecturer at the University of Tennessee, tax-free overtime legislation would not just be attractive to employees as a way to boost take-home pay. Additionally, he thinks it might develop into a useful tool for companies looking to recruit and retain employees.
In a Newsweek conversation, Beene stated: “As some firms are finding it more difficult to maintain a complete workforce and are depending on current employees to cover those extra hours, overtime pay represents an economic aspect becoming more widespread. Finding workers who are willing to put in additional hours each week might be challenging, even with higher compensation.”
The tax benefit might make the offer more enticing.
As all of this is happening at the national level, politicians in numerous states have introduced and/or forwarded bills that support Trump’s populist campaign and “no tax on overtime.” Eleven states had enacted fifteen articles of legislation at the time this article was published, most of which had been passed in the previous few months.
Although Alabama now has the sole statute that exempts employees from paying overtime taxes, other states are attempting to emulate it. But if you’re asking did the no tax on tips and overtime bill pass into federal law? The answer remains: not yet, though support is growing both nationally and locally.
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