Tax cuts are in the news again. Former president Donald Trump grabbed headlines when he floated the idea of making all overtime hours tax-free for workers who exceed 40 hours per week. During a campaign rally in Tucson, Arizona, the announcement became another hot tax topic, like no tax on tips, during the 2024 presidential race.
"We will end all taxes on overtime,” Trump told supporters during the election campaign.
Trump, who is now President-elect, argued that eliminating the tax on overtime pay would incentivize work, benefit hardworking Americans, and make it easier for companies to attract employees.
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“That gives people more of an incentive to work. It gives the companies a lot. It's a lot easier to get the people,” Trump added.
So, is this proposal an empty campaign promise? And what’s the current state of play with overtime pay?
Here’s more of what you need to know.
Related: Project 2025 Tax Overhaul Blueprint: What to Know
How overtime is taxed
Overtime pay is taxed like regular wages.
- The Fair Labor Standards Act (FLSA) mandates that eligible workers receive at least 1.5 times their standard pay rate for hours worked beyond the typical 40-hour workweek.
- Overtime pay is subject to federal income tax, and Social Security and Medicare taxes.
- The Department of Labor recently enacted a new overtime rule that is expected to help millions of workers. (More on that below.)
In recent years, Gallop polling reveals a majority of workers regularly clock more than 40 hours a week.
Meanwhile, other data show that nearly 80% of voters support some form of overtime pay protection for all workers. (That support was reportedly strong across political party lines.)
No tax on overtime?
The "no tax on overtime" proposal is part of a series of tax cut promises Trump made during his campaign. As Kiplinger has reported, he previously suggested eliminating taxes on tips and ending the tax on Social Security benefits.
Some see these proposals, criticized by economists and policymakers, as ways to appeal to so-called working-class voters.
While the idea of tax-free overtime may sound appealing, critics worry. There's the potentially significant loss of federal tax revenue (on the low end, depending on what income is exempted, an estimated $145 billion over ten years, according to the Tax Foundation) and the possibility of employers relying more on overtime instead of hiring additional workers.
Similar concerns have been raised about the no-tax-on-tips proposal (the Tax Foundation estimates a cost, on the low side, of $107 billion over ten years).
Project 2025 overtime pay
It’s worth noting that policy proposals in Project 2025, widely seen as a playbook for the next Republican administration, oppose expanding overtime protections.
For example, the conservative blueprint states, “Congress should provide flexibility to employers and employees to calculate the overtime period over a longer number of weeks.”
The Center for American Progress says this approach “would put more power in the hands of employers to exploit employees, which is seemingly part of Project 2025’s larger goal: pad corporate bottom lines at the expense of workers.”
During the presidential campaign, Trump tried to distance himself from the playbook by saying in a debate, "I have nothing to do with Project 2025. That's out there. I haven't read it. I don't want to read it."
Now that Trump is President-elect, it remains to be seen how much of Project 2025 will be implemented in his administration.
For more information, see Kiplinger's Project 2025 Tax Overhaul Blueprint report.
New overtime rules 2025?
This campaign pledge and questions about how Trump will handle overtime come as many in the U.S. deal with the varied impacts of inflation, including worry over wages and income not keeping pace.
The Biden administration recently enacted a rule that would have raised the minimum salary requirement for overtime pay eligibility, The move was designed to boost wages for workers with lower incomes.
- The new Department of Labor rule was scheduled to take effect in two stages over the next year.
- The FLSA salary threshold first increased in July to $43,888 annually ($844 per week), up from the previous $35,568 ($684 per week).
- Future threshold increases would occur in later years, beginning as soon as 2025. For instance, on January 1, 2025, the threshold would increase to $58,656 a year ($1,128 per week).
- This change was expected to extend overtime pay protection to millions of additional workers who weren’t previously eligible.
With some exceptions, most employers would be required to follow the overtime rules, at least regarding the changes from July 1, 2024.
Texas overtime ruling
But what happened in Texas? Meanwhile, Texas sued the Department of Labor over the new overtime pay rule, which, as mentioned, would raise the minimum salary threshold for overtime exemption to $58,656 as of January 1, 2025.
Texas argued that the federal government (DOL) overstepped its authority by focusing on salary rather than job duties.
A federal judge in the Eastern District of Texas initially issued a preliminary injunction blocking enforcement of the rule against the state of Texas as an employer. However, as of late November, a Texas federal court struck down the new DOL overtime rule.
As a result, the new overtime rule's implementation is blocked nationwide and the salary thresholds have reverted to the 2019 levels. ($684 per week ($35,568 a year) for most employees and $107,432 for highly compensated employees.)
Stay tuned. It's hard to say whether DOL will appeal the ruling given that a new administration will be in the White House come 2025.
Overtimes taxes: Bottom line
Whatever happens, any new economic policies like the no overtime tax proposal will likely face scrutiny well into the coming year. That's because Congress will have to address expiring tax provisions in the Tax Cuts and Jobs Act (TCJA), initially enacted in Trump's first term in the White House.
Also, remember that any President has to go through a complex legislative process to enact new tax policy. That’s no small feat.
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