No tax on tips? Congress is considering it.
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Days after the Ways and Means Committee released a draft version of the tax bill, followed by a substitute amendment, questions began to fly. Tops on the list: Did Trump keep his promise to end taxes on tips, overtime, and Social Security? The answer isn’t as simple as you think.
No Tax On Tips
Trump initially promised to end taxes on tips while campaigning in June in the swing state of Nevada. The hospitality industry is huge in Nevada, making up more than 20% of jobs in the state. The pledge didn’t make it into the draft bill but did make it into the chairman’s amendment, introduced on Monday.
As proposed, tip income would be temporarily deductible—only for tax years 2025 through 2028—for individuals who work in what are considered “traditionally and customarily tipped industries.” (According to the proposal, that would only include industries that accepted tips on or before December 31, 2024—Treasury is directed to make a list of those that qualify.)
Self-employed persons, like Uber and Lyft drivers, would also qualify for the break as currently written.
Highly compensated employees (those who make over $160,000 in 2025) would be excluded. And, in a nod to concerns that all of the sudden, clever tax lawyers, business owners and others could wiggle their way into a no-tax-on-tips zone, Treasury is directed to craft regulations or other guidance to “prevent reclassification of income as qualified tips… to prevent abuse of the deduction.”
It’s important to note that this is a federal income tax deduction, not an exclusion. That means that tips would still be reportable—and taxable at the state and local level. It also means that tips would remain subject to payroll taxes, including Social Security and Medicare, for employees.
Employers will get a break, however, via a tip credit. The deduction, which has been in place since 1993 for restaurants, is known as the 45B credit and allows for a rebate on the entire employer side of FICA taxes on tips. The instructions for claiming the 45B credit made clear it covers tips to employers involved in “providing, delivering, or serving food or beverages for consumption.” The result is that tips provided elsewhere—like in salons—are subject to payroll taxes for both employees and employers, even though not a penny goes to the salon.
The most recent tax bill proposes to change that by extending the benefit to the beauty industry. Under the amendment, section 45B would be amended to include barbers and hair care, nail care, esthetics, and body and spa treatments.
No Tax On Overtime
Trump also promised to eliminate taxes on overtime pay. That pledge was originally made in September 2024, during a speech in Tucson, Arizona. That break also didn’t make it into the draft bill, but did make it into the chairman’s amendment.
As proposed, workers who receive overtime would not have to pay taxes on that extra compensation. For purposes of the rule, overtime compensation is defined as the amount paid in excess of the employee’s regular rate—only the overtime compensation is part of the break. While taxpayers wouldn’t have to itemize to take advantage of the benefit, it would be temporary—only for tax years 2025 through 2028.
This tax break is also proposed as a deduction, not an exclusion. That means that overtime pay would still be reportable, and, as with tips, overtime pay would remain subject to payroll taxes, including Social Security and Medicare, for employees.
Quick Payroll Tax Primer
Confused about the employer versus employee sides of payroll taxes? For wage earners, Social Security and Medicare taxes are called FICA (Federal Insurance Contributions Act) and are taken out of your paycheck. Taxes on self-employment income are sometimes called SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.
If you’re employed, you pay Social Security tax at a rate of 6.2% as the employee, and your employer pays the same tax rate on your behalf. If you’re self-employed, you are responsible for both parts.
Social Security taxes are subject to a wage cap. That means you pay Social Security taxes on your earnings until you hit the magic number. After that, your wages are no longer subject to Social Security taxes. For 2025, the magic number is $176,100. That means that whether you make $1,000 or $100,000, you will pay Social Security taxes on your income. But if you earn $176,101? You’ll pay Social Security taxes on the first $176,100, but not on the extra dollar. And if you earn $1,176,100? Same result: you’ll pay Social Security taxes on $176,100, but not on the extra million.
In contrast, all wages are subject to Medicare taxes. If you’re employed, you pay Medicare tax of 1.45% as the employee, and your employer kicks in tax at the same rate. As before, if you’re self-employed, you’ll pay both portions, for a total tax rate of 2.9%.
High-income taxpayers are also subject to an additional Medicare tax of 0.9% tacked onto wages that exceed $200,000 for single filers—those thresholds are $125,000 for married taxpayers filing separately and $250,000 for married taxpayers filing jointly.
If you’re a wage earner, your employer collects your Social Security and Medicare payments and remits both their portion and your share to the government. Self-employed persons pay the IRS directly. Retaining payroll taxes on tips and overtime may mean a bigger bite at tax time, but there is an upside: No matter who pays, these taxes are credited toward your retirement benefits.
No Tax On Social Security
Last year, also on the campaign trail, Trump promised to exempt Social Security income from tax. The idea was popular, but likely because many people do not understand how Social Security income is taxed. The majority of people who get Social Security do not pay federal income tax on those benefits—according to the Social Security Administration, only about 48% of people pay federal income taxes on their benefits (though some studies suggest that the percentage is higher).
If your only source of income is your Social Security check, your benefits are generally not taxable. You may not even need to file a federal income tax return.
If you receive income from other sources, your benefits would not be taxed unless your combined income exceeds the base amount for your filing status, and then, the taxable amount is based on income. No one pays federal income tax on more than 85% of their Social Security benefits.
There is no language in the draft bill or the amendment that would further exempt Social Security from tax. However, the proposal does include a new—also temporary—deduction of $4,000 for the tax years 2025 through 2028.
The deduction would be available to taxpayers who itemize and those who claim the standard deduction. It would begin to phase out once income hits $150,000 for married taxpayers filing jointly and $75,000 for all other taxpayers (disappearing completely when modified adjusted income reaches $350,000 for married taxpayers and $175,000 for all other taxpayers).
To claim the deduction, you would have to have a Social Security number and, if married, your spouse would also have to have a Social Security number.
The deduction is not the same as a refundable credit. That means you will not receive a benefit if you have little to no taxable income—the case for most Social Security recipients. The deduction simply disappears. Realistically, the deduction won’t help seniors with little to no other income sources outside of Social Security and will primarily benefit those with income in addition to Social Security.
What Comes Next
You can see the original draft version of the bill before the markup here. The Smith amendment version is here.
The bill is still working its way through the House where Republicans hold a slim majority. Even if it’s approved, the House bill must conform to the Senate version to be signed into law.
Keep checking our coverage for more details.
Source: No Taxes On Tips, Overtime, And Social Security? Not Exactly
