How a proposed Trump budget to end taxes on tips and overtime pay could have a ripple effect

A new provision in former President Donald Trump’s proposed budget would eliminate taxes on tips and overtime pay, a move many workers might welcome, especially in service and shift-based industries.

But financial expert Paul Hood says that the change could come with ripple effects.

Could Tax-Free Tips Backfire for Workers?

Paul Hood, a Tulsa-based CPA and financial advisor, said that while lower taxes sound good in theory, the implications of exempting tips and overtime from federal income tax need further analysis.

“I’m a low-tax guy anyway, so I think it’s a great provision,” Hood said. “But there’s a ripple effect.”

For example, many tipped workers in Oklahoma earn a base wage of just $2.13 an hour. Employers rely on reported tip income to calculate whether workers meet the minimum wage threshold.

“If tips aren’t taxable, how does that affect minimum wage calculations?” Hood asked.

Impact on Tax Credits and Social Security

Another concern centers on how the proposed change might impact federal benefits like the Earned Income Tax Credit (EITC), a key refund program for low-income workers.

“If those tips aren’t taxable, does that mean you don’t get the earned income credit?” Hood said. “That could reduce your refund significantly.”

He also pointed to long-term effects on Social Security benefits. If tips and overtime are not considered taxable income, they might not count toward a worker’s earnings record, potentially shrinking their future Social Security payouts.

“Is it taxable for Social Security? That affects how much you’ll get when you retire,” he explained.

Unintended Consequences for Businesses

The changes could also complicate bookkeeping for business owners. Currently, businesses receive tax credits for tipped wages paid to employees. If tips are no longer taxable, that benefit might disappear, another example of how one change could disrupt multiple systems.

“There’s about five or six different provisions that are affected by that one thing,” Hood said.

While some lawmakers have suggested that tips could still appear on pay stubs and tax returns, but with an offsetting deduction, it’s unclear how the IRS would enforce or track that system.

“It may seem like a great thing, but it’s almost like robbing Peter to pay Paul,” Hood said. “Somebody’s still going to have to foot the bill.”

As the budget bill continues through the Senate, Hood says the financial community is watching closely.

“In 40 years of doing what I’m doing, I’ve never seen anything like this,” he said. “It’s going to be entertaining—and a challenge.”