How do taxes work on overtime and tips? Trump demands changes

President Donald Trump has renewed his call to tax cuts, including the elimination of taxes on overtime and tips. In conversation with the congress, he asked the legislators to support what he described as an urgently needed relief for workers.

His proposal has triggered discussions about its feasibility, economic effects and possible consequences for employees and government income.

During his speech, Trump explained: “I am not asking for taxes for tips, no tax on overtime and no tax on social security benefits for our great seniors.”

He positioned the plan as part of his wider tax strategy, which aimed to facilitate the financial burden on employees and pensioners, especially in view of the inflation concerns.

How do taxes work on overtime?

According to the US tax law, overtime is treated as a regular income and is subject to the taxes of the federal government and state taxes. The Fair Labor Standards Act (FLSA) stipulates that employees who work for more than 40 hours a week receive at least 1.5 times their hourly wages. However, these income remain completely taxable according to existing IRS guidelines.

Trump's plan proposes to do overtime tax -free and to enable employees to receive more of their income. He argued that this change would encourage employees to take over additional hours without concern for additional tax burdens.

“People who work overtime are among the hardest working citizens in our country, and nobody in Washington was looking for them for too long,” said Trump during a campaign rally in September 2024.

How are tips taxed?

According to the applicable IRS rules, tips are viewed as taxable income. Employees who earn more than 20 US dollars to tips per month have to report, and employers must hold back the income and salary billing taxes accordingly (IRS). Both employees and employers pay their respective part of social security and Medicare taxes for registered tips.

Trump initially proposed to remove federal tax on tips in June 2024 and claimed that he had received the idea of ​​a waitress in his hotel in Las Vegas. “For these hotel employees and people who receive tips, they will be very happy, because when I come to the office, we will not raise any taxes on tips, people who give tips … We will do this immediately in the office, “said Trump at the time.

Followers of the plan argue that top workers – who often earn under the standard wage – would significantly benefit from keeping more of their income. However, critics warn that the liberation of tips from taxes could create gaps that can lead to a restructuring of wages and that employers may benefit more than employees.

Economic analysts estimate that the elimination of taxes at overtime could reduce government income by $ 250 billion to 1.4 trillion dollars in the next decade alone. If the exemption extends to all employees who are entitled to reduce tax, the loss of sales can be up to 5 trillion dollars.

What's next

While the US representative house has approved a budget decision according to Trump's tax priorities, the measure does not yet contain any specific political language that eliminates taxes for overtime or tips.

The resolution serves more as a general guideline than as a binding legislation that “does not provide funding for federal programs or changes to tax law,” said the Congress's household office. The Republicans of the Senate have also expressed concerns about the proposal, in particular with regard to the effects on state income and claims.

Experts remain divided into the long -term effects of the plan. Alex Beene, an instructor for financial competence at the University of Tennessee in Martin, told Newsweek The fact that a tax -free overtime policy would not only address the employees who achieve an additional income could also become a strategic instrument for employers and help them motivate overtime with their employees.

“The only question will be whether the congress will also be enthusiastic for the proposal, especially at a time when the public debt is given more focus,” said Beene.

Trump's plan is currently a campaign proposal that is waiting for legislative measures. It is uncertain whether the congress will take the initiative – and how it would be implemented.