A few days after the Ways and Means Committee released a draft tax bill along with an alternative amendment, several questions surfaced. The primary inquiry: Has Trump fulfilled his promise to eliminate taxes on tips, overtime, and Social Security? The answer is somewhat complex.
Clarification on Tip Taxes
Trump first made his promise to abolish tip taxes during his campaign in Nevada last June, a state where the hospitality sector represents over 20% of employment. While this pledge didn’t make it into the initial draft of the bill, it was later incorporated into an amendment introduced by the chairman on Monday.
The amendment suggests that tip income will be temporarily deductible for tax purposes from 2025 to 2028 for individuals working in “traditional and customary inclined industries.” Notably, it only covers businesses that accepted tips before December 31, 2024.
Self-employed workers, like Uber and Lyft drivers, will also benefit from these breaks, as specified in the proposal.
However, those earning over $160,000 in 2025 are excluded. Additionally, to address concerns about savvy tax lawyers and business owners potentially exploiting tax loopholes, the Treasury has been tasked with creating regulations to “prevent income reclassification as a qualifying tip… thus thwarting deduction misuse.”
This is key to understanding that the proposal refers to a federal income tax credit, not an exclusion. This means tips still need to be reported and will be taxed at state and local levels while remaining subject to payroll taxes like Social Security and Medicare for employees.
Employers will benefit from tip credits, which have existed in restaurants since 1993. These 45B credits allow for tax deductions related to tips on employer-wide rebates for FICA taxes, covering services related to food or drink. Even tips given in other settings, like salons, will still lead to payroll tax obligations.
The tax bill also proposes extending these benefits to the beauty industry, specifically modifying Section 45B to encompass barbering, hair care, nail treatments, aesthetics, and spa services.
No Change to Overtime Tax
In addition to tips, Trump had vowed to remove taxes on overtime salaries, a promise made in a speech in Tucson, Arizona back in September 2024. Similar to the tips provision, no tax relief on overtime was present in the draft bill but was included in the chairman’s amendment.
The amendment states that workers who earn overtime will not have to pay taxes on that extra pay. For the purposes of these regulations, overtime is defined as any additional payment beyond standard wages. Taxpayers can benefit from this tax break, available from 2025 to 2028, but it is presented as a deduction rather than an exclusion. This means overtime payments still need to be reported and are also subject to payroll taxes.
Understanding Payroll Taxes
If payroll taxes confuse you, here’s a quick rundown. Employees have Social Security and Medicare taxes known as FICA (Federal Insurance Contributions Act) deducted from their paychecks. For the self-employed, their contributions count as SECA (Self-Employment Contributions Act) tax, as they cover both employer and employee portions.
Typically, Social Security tax is 6.2% from employees plus the same from employers, although the self-employed pay 12.4%. There’s a wage cap on Social Security tax—meaning taxpayers only pay up to a specific income threshold. For 2025, that cap will be $176,100.
On the other hand, all income is subject to Medicare tax, which is set at 1.45% each from employees and employers, and self-employed individuals pay a total of 2.9%. High-income earners face an additional Medicare tax on wages above $200,000 for single filers, with other specific thresholds for married taxpayers.
No Change for Social Security Taxes
Last year, Trump proposed exempting Social Security income from taxes, a maneuver that resonated with voters, though many seem unaware of its current applicability. Interestingly, only about 48% of Social Security recipients pay federal income tax on those benefits; many don’t need to file a tax return at all if they rely solely on Social Security income.
However, if recipients have other income, their benefits may be taxed depending on the total amount, although no more than 85% is typically taxable. The recent proposal does not include any exemption for Social Security taxes but suggests new temporary bonds worth $4,000 for the 2025-2028 tax years.
These bonds will be accessible for taxpayers whether they are itemizing or taking standard deductions, with adjusted income thresholds set for married taxpayers and others. To claim this deduction, a Social Security number is necessary for both the claimant and the spouse, if applicable.
This deduction differs from a refundable credit, meaning most Social Security beneficiaries with little taxable income likely won’t gain much benefit. This deduction may be of most use to older individuals who largely depend on Social Security as their income source.
Looking Ahead
You can find the original draft of the bill before any markup here. The revised version is here.
The bill continues to navigate through the House of Representatives, where the Republicans hold a slim majority. Even if it passes, it must align with the Senate’s version before becoming law.
For more detailed coverage, keep an eye out for updates.
