SAUL LOEB/AFP via Getty Images; Getty Images; Chelsea Jia Feng/BI
- Presidential hopeful Donald Trump has proposed getting rid of taxes on tips and overtime.
- Trump said he intends for those proposals to help low earners and incentivize work.
- Experts say both workers and employers will quickly adjust and figure out how to optimize their tax bills.
If former President Donald Trump gets his way, workers who collect overtime pay or tips could stop paying taxes on them.
During remarks in Arizona earlier in September, he said that ditching taxes on overtime would give "people more of an incentive to work."
The current system treats overtime and tips just like any other income; they're taxed as part of a worker's normal wages. But if Trump's proposal goes into place, it could save hospitality workers a significant amount each year.
There were around 4 million workers in tipped occupations in 2023, according to an analysis from The Budget Lab at Yale. And while part of the group had incomes low enough that they paid no income tax, there's a pool of more than 2 million workers that stand to benefit.
It's a policy that has broad appeal: an Ipsos poll from August found that the majority of Americans support ending federal taxes on tips. It's also a rare topic Trump and Kamala Harris can agree on. In mid-August, the vice president and Oval Office hopeful jumped on board with her own proposal for making some tips tax-exempt.
Millions more workers — specifically those paid hourly, as well as salaried workers who make under about $44,000 a year — are eligible for overtime, typically receiving 150% of their usual pay for going over 40 hours a week.
These measures, if enacted, could fundamentally alter the structure of income across America, especially since both employees and companies are expected to quickly optimize their tax strategies.
Tax-strategy adjustments
The first question is when exactly the new changes would go into place. For starters, Trump has to win the election, something that's currently a coin flip, according to polling averages that have Trump and Harris roughly tied in battleground states.
If Trump does emerge victorious, implementing these changes would require congressional approval. Given that the former president's 2017 tax laws are set to expire in 2025, lawmakers may seize the opportunity to include these proposals in a new set of laws.
As soon as that law is signed, it's likely that employees would quickly look for ways to navigate and optimize the new system in an attempt to lower their tax burdens.
Employers would be no different, and shifts to current pay structures should be expected. Heidi Shierholz, senior economist at EPI Action — a left-leaning nonpartisan organization advocating for economic justice — told Business Insider that businesses could pay their workers slightly less to allow employees to have the financial benefit of not having their overtime pay or tips taxed.
"Their employer can pay less to keep them but the worker is not worse off because now they don't have to pay taxes on that," Shierholz said.
It could also result in service-industry businesses further shifting the burden of paying workers a living wage onto customers, and reducing the amount of tax paid into Social Security.
Multiple other experts told BI that such tax-optimization tactics would also be used by both workers and employers outside the service industry.
It could mean, for example, that some businesses claim that the fees they charge are actually tips. Or it could mean some salaried workers switch to hourly wages in order to qualify for a higher rate of untaxed overtime pay.
Joe Hughes, a senior analyst on federal tax policy at the Institute on Taxation and Economic Policy, told BI that "you would need a lot of safeguards in place to keep this from being just another avenue for tax avoidance."
He continued: "It's at least applaudable that Trump says that he wants to help low-income workers. But I think that there are much better avenues to do that than exempting very specific types of income."
Alex Muresianu, a senior policy analyst at the Tax Foundation, told BI that a tip has a specific definition: it has to be a voluntary payment given to a worker by a customer that has not been negotiated beforehand. In an extreme case, Muresianu said, some workers could stretch that.
"Introducing that as the norm in response to the policy would effectively shift some compensation that is normally small business income or something into tax-exempt tips," he said.
Hughes said that workers could take a similar approach with the overtime proposal — they might choose to reclassify themselves as wage earners instead of salaried earners so they could earn tax-exempt overtime pay.
"A lot of lawyers are working 60, 70 hours a week, right? So why not reclassify yourself as a wage employee, then you get to take advantage of overtime rules and not pay taxes on it," he said.
Shierholz said that the US already has a complicated tax code, and there are more efficient ways to better help low-income workers, like increasing overtime pay and raising the minimum wage so workers do not have to rely on tips from customers to stay afloat.
"A problem through this absolutely Rube Goldberg approach is that it has all of these unintended distortionary consequences that you could just address directly," she said.
The Trump campaign did not respond to a request for comment on the potential for the tax proposals to lead to avoidance. But Karoline Leavitt, the Trump campaign's national press secretary, told BI that "Trump proudly passed the largest tax cuts for hardworking Americans in history."
"When President Trump is back in the White House, he will make the Trump tax cuts permanent and end taxes on tips for service workers, end taxes on overtime pay, and end tax on Social Security," she added.
Do you collect tips or overtime pay? What are your thoughts on eliminating taxes on tips and overtime? Share your story with this reporter at asheffey@businessinsider.com.