The Federal ‘No Tax on Tips and OT’ Push: Status, Data, Pros and Cons

“No tax on tips and overtime” was one of the signature campaign promises and rallying cries of Donald Trump’s 2024 bid to become U.S. President.

Several months after his election win and inauguration, it remains a topic of great debate, with supporters touting the plausible financial impact on American workers (and employers) and detractors calling out the potential for adding trillions of dollars to the federal deficit as well as resulting tax process complexities.

This article aims to get you up to speed on federal legislation progress on this topic, with data, insights and commentary on both the tips and overtime elements.

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The Overall Road Toward Legislation

President Trump’s pursuit of tax cuts on the tips earned by certain U.S. workers and on overtime compensation for hourly/nonexempt workers is encapsulated in the current and upcoming federal budget creation and approval process.

On Feb. 25, the U.S. House of Representatives narrowly passed a Republican budget resolution that calls for $4.5 trillion in tax cuts and a $2 trillion reduction in federal spending over a decade. Four days earlier, on Feb. 21, Senate Republicans passed a budget outline for a narrow bill focused on border enforcement and defense, choosing to take on tax policy in a separate bill later this year.

While the budget process churns forward, members of Congress have two bills — the No Tax on Tips Act and the Overtime Pay Tax Relief Act — at the ready to mobilize Trump’s vision.

A Closer Look at Tips as an Issue

The No Tax on Tips Act was introduced in the House of Representatives (House Bill 482) on Jan. 16 by bill sponsor Vern Buchanon (R-Florida) and 14 co-sponsors (13 Republicans as well as one Democrat [Steven Horsford of Nevada]). The Senate version (Senate Bill 129) was also introduced Jan. 16, with Ted Cruz (R-Texas) as sponsor and eight senators (six Republicans and two Democrats) as cosponsors.

If passed, this legislation would exempt “cash tips” — in the form of cash, credit and debit card charges, and checks — from federal income tax by allowing certain taxpayers to claim a 100% deduction at filing for tipped wages. The text includes guardrails to ensure only traditionally tipped employees will benefit.

The Fair Labor Standards Act (FLSA) defines a tipped worker as someone who “engages in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.” Jobs typically considered as eligible for tips include food/beverage servers, bartenders, baristas, taxi/ride-sharing drivers, delivery drivers, hair stylists, nail technicians, personal trainers, valets, bellhops, caddies, tour guides and casino dealers. The Budget Lab at Yale University estimates there are approximately 4 million American workers in tipped occupations.

Several industry associations applauded the bill.

Sean Kennedy, the executive vice president for public affairs for the National Restaurant Association, stated, “Eliminating taxes on tips would put cash back in the pocket of a significant number of workers in the restaurant and foodservice industry and could help restaurant operators recruit industry workforce. [This Act] is sensible legislation that includes refinements and protections to make it fiscally responsible while still benefiting our employees.”

Nina Daily, the executive director of the Professional Beauty Association, said, “As the second-most tipped sector after restaurants, we deeply value … efforts to support the 1.3 million licensed beauty professionals and the employers who sustain this vital industry across the United States. Ensuring tax fairness across sectors and advocating for the working class are fundamental to our nation’s tax principles.”

Michael Layman, the chief advocacy officer for the International Franchise Association, added, “[This proposal] helps workers and small business owners alike. Many of the 830,000 franchises and 9 million workers we represent will benefit from this federal payroll tax credit. We appreciate this effort to bring parity across industries with tipped employees and level the playing field for small businesses on Main Street nationwide.”

While most Republican (and some Democratic) members of Congress support reducing or eliminating taxes on tips from a political perspective, some economists believe such a move would hurt more than help by increasing the federal budget deficit and accelerating Americans’ fatigue in tipping workers.

The University of Pennsylvania’s Wharton School of Business estimated that eliminating taxes on tips would add $70 billion to the U.S. budget deficit over a 10-year span (2025 to 2034). Tax Foundation, a nonprofit research and analysis organization, estimated that figure could reach $107 billion.
According to a recent USA Today poll, 63% of respondents said too many places are asking for tips, and 48% said they’re tired of being asked to tip. Joseph Rosenberg, a senior fellow at the Urban-Brookings Tax Policy Center, told USA Today, “We could see mandatory or required tips that are added on, especially in places like restaurants. Potentially we’ll see more of that as [businesses] try to shift more of the purchase price to look like a tip.”

Tips Legislation Momentum Grows at the State Level

As all this plays out at the federal level, Republican lawmakers in many states have displayed their allegiance to Trump and his “no tax on tips” mantra by introducing and/or forwarding related bills. As of publication of this article, 23 states had entered 40 pieces of legislation over the past several months. A Workspan Daily Plus+ article provides details on this state-level push.

A Closer Look at Overtime Compensation as an Issue

During a Sept. 12, 2024, campaign stop in Tucson, Ariz., Trump pledged to eliminate taxes on overtime pay, saying such legislation could bring financial benefits to U.S. workers and provide more Americans with “an incentive to work.”

“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,” he said at the rally.

The Overtime Pay Relief Act was introduced in the House of Representatives (House Bill 561) on Jan. 20 by bill sponsor Don Bacon (R-Nebraska) and referred to the Ways and Means Committee. “The people made it clear last November that they want something done to alleviate their financial hardship,” Bacon said. “[This bill is] a first step in the right direction.” There is currently not a Senate version of this legislation.

Overtime and premium pay annually make up approximately 3% of total workforce compensation, or around 4.2% of salaries and wages, according to the U.S. Department of Labor’s Bureau of Labor Statistics in its “Employer Costs for Employee Compensation” resource.

Tax Foundation stated last fall that holding current overtime ratios constant over a 10-year window equates to approximately $5.7 trillion in overtime and premium pay. Its overtime research reports assume that, on average, this pay is taxed at a marginal income tax rate of 12%. For its upper-bound estimates, overtime pay is taxed, on average, at a marginal income tax rate of 18%.

Garrett Watson, Tax Foundation’s director of policy analysis, and Erica York, its vice president of federal tax policy, called out some sensitivities with federal “no tax on overtime” legislation in a Sept. 13 blog post.

“Exempting overtime is a more complicated proposal than Trump’s other proposed exemptions for tips and Social Security, which are both already subject to some tax reporting requirements,” they wrote. “Instead, exempting a portion of wage income, based on hours worked, introduces an entirely new distinction in the tax code, requiring additional information reporting of hours, likely from employers and employees, as well as new administrative checks.”

A Reuters review of four leading budget forecasters also pointed out that, combined with tax cuts Trump plans to resurrect from his first term, any proposed cuts on overtime pay — as well as related new cuts on tips and Social Security benefits — could add $3.6 trillion to $6.6 trillion to primary U.S. deficits over the next decade.

House of Representatives member Thomas Massie (R-Kentucky) said, “It’s insane. We’re going to increase the deficit with this. Why would I vote for that? You can’t cut taxes without cutting spending, and they’re not really cutting spending.”

Others, however, see merit in such a proposal. Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, believes a tax-free overtime policy wouldn’t just appeal to workers as a means to increase take-home pay. He also feels it could become a strategic tool to help employers attract and retain workers.

“Overtime pay is an economic factor becoming more common, as some employers are having a harder time staying fully staffed and are leaning on existing employees to fill those additional hours,” Beene said in an interview with Newsweek. “Even with additional pay [from time-and-a-half rates], it can be difficult to find employees willing to take on those extra hours each week.”

The tax break could help sweeten the deal.

Overtime Legislation Momentum Grows at the State Level

As all this plays out at the federal level, lawmakers in many states have supported Trump’s populist push and “no tax on overtime” pledge by introducing and/or forwarding related bills. As of publication of this article, 11 states had entered 15 pieces of legislation, and most of those have occurred over the past several months.

While Alabama has the only active law that exempts workers from paying tax on overtime, other states are looking to follow suit. A Workspan Daily Plus+ article provides details on this state-level push.

Editor’s Note: Additional Content

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