Donald Trump's push to eliminate taxes on overtime and tips faces budget hurdles: All you need to know

House Republicans have advanced a budget resolution that could eliminate taxes on overtime pay and tips—key promises from former President Donald Trump’s campaign. However, the proposal faces significant financial roadblocks, with lawmakers struggling to offset the cost amid a mounting federal deficit.
The House narrowly passed the budget resolution in a 217-215 vote on Tuesday, seeking to extend the 2017 Trump tax cuts and introduce exemptions for tip income and overtime wages. Trump has repeatedly pledged to remove these taxes, arguing it would provide relief to workers in the service industry and those putting in extra hours.
“The Senate wants it. I think the House wants it as well,” House Speaker Mike Johnson (R-La.) told reporters, according to Politico.


Under current law, tips over $20 per month are taxed as wages, and overtime pay is subject to regular income tax rates. The proposed exemptions would increase take-home pay for millions of workers, particularly in the restaurant, hospitality, and gig economy sectors. However, extending Trump’s broader 2017 tax cuts—set to expire this year—comes with a hefty price tag, estimated at $4 trillion over the next decade.
To comply with budgetary rules, House Republicans initially proposed a 10-year extension of these tax cuts but must identify $2 trillion in spending reductions to offset the cost. The challenge is finding cuts without touching politically sensitive programs like Social Security and Medicare. A Forbes report suggests that discretionary spending, including education and defense, could be the only viable target—an approach likely to face resistance from both parties.

To avoid making deep spending cuts, Senate Republicans have proposed a shift to a “current policy” baseline, which assumes the 2017 tax cuts are already permanent. This accounting maneuver would allow for the extension of tax breaks without officially adding to the deficit.
“The current policy baseline is the only realistic way to make the 2017 Trump tax cuts permanent,” wrote Jake Sherman in Punchbowl News.
If adopted, this method would eliminate the need for $2 trillion in offsets, making it easier to pass Trump’s tax breaks, including no tax on tips and overtime pay. Speaker Johnson has expressed support for the approach, aligning with Senate Majority Whip John Thune (R-S.D.), who sees it as a path forward in negotiations.

Despite growing support in the Senate, some House Republicans remain skeptical. Critics argue that switching to a current policy baseline disguises the true fiscal impact of the tax cuts rather than addressing the budget shortfall.
“Current policy baseline, I consider it to be a made-up term—made up to avoid the difficulty of the fiscal impact,” Rep. David Schweikert (R-Ariz.), chairman of the Joint Economic Committee, told The Washington Post.

If enacted, the tax exemptions would primarily benefit service industry workers and employees logging extra hours. Removing taxes on tips and overtime pay could boost take-home wages and incentivize additional work, potentially stimulating economic growth.
However, some business owners have raised concerns about unintended consequences. Ryan Hughes-Svab, co-owner of The Misfit Lou restaurant and bar, told USA Today, “I think it could benefit a lot of people, but I also do think when you look at the negative side of it, there could be some repercussions.”
Labor organizations have echoed similar sentiments, supporting tax relief but calling for broader wage reforms. “Eliminating taxes on tips and ending the $2.13 sub-minimum wage, along with going after big corporations’ price gouging on food, gas, and housing, must be part of an overall programme to tackle the high cost of living for working families,” said Culinary Union secretary-treasurer Ted Pappageorge.

The House budget proposal now heads to the Senate, where negotiations over baseline accounting could determine its fate. If the Senate’s approach prevails, the tax cuts could move forward without requiring spending cuts. However, if the House insists on its $2 trillion reduction plan, lawmakers will need to identify major budgetary savings.
The coming weeks will be crucial in determining whether Trump’s promise of tax-free tips and overtime pay becomes a reality or stalls due to fiscal constraints.
Under the US Tax Code, employees must report tips exceeding $20 per month from a single job as taxable wages. This includes cash tips received directly from customers, tips distributed from credit and debit card payments, and amounts received through tip-sharing arrangements. Employees are required to maintain daily records of their tips and report them to their employer.
Employers, in turn, are responsible for withholding income tax, as well as Social Security and Medicare (FICA) contributions, from both wages and reported tip income. Additionally, employers must contribute their share of FICA taxes based on the employee’s combined wages and tip earnings.
The idea of eliminating taxes on tips has sparked mixed reactions among business owners, workers, and policymakers. Ryan Hughes-Svab, co-owner of The Misfit Lou restaurant and bar, told USA Today that while the proposal could benefit many workers, it might also lead to unintended consequences. She noted concerns about an "overtipped culture" and the possibility of larger companies exploiting the policy by lowering base wages and treating tips as compensation.
Labor advocates argue that removing taxes on tips should be part of a broader effort to improve wages and tackle rising living costs. Culinary Union secretary-treasurer Ted Pappageorge emphasized that alongside tax relief, measures should include eliminating the $2.13 per hour sub-minimum wage for tipped workers and addressing corporate price hikes on essentials like food, gas, and housing.
Congressman Steven Horsford, a proponent of the legislation, has framed the initiative as a way to support millions of low-wage workers, particularly in states like Nevada, where many rely on tips. He stressed that the bill would provide meaningful financial relief by allowing workers to keep their full gratuities.