The millions of Americans who work overtime have a little more reason to hope for tax relief. Republicans this week eked out a slim majority in the House, winning 218 seats, with a few races still uncalled. This means a Republican trifecta and more chance of passing proposals floated by President-elect Trump on the campaign trail, including one that would scrap taxes on overtime.
Details on the proposal are scant and some Democrats have called the overtime tax promise “as fake as his tan.” It may not be the top priority of the new administration when it comes to tax cuts, or the easiest to pass, but the overtime proposal is likely to be part of broader discussions on tax reform.”The American people re-elected President Trump by a resounding margin giving him a mandate to implement the promises he made on the campaign trail. He will deliver,” Karoline Leavitt, a spokesperson for the Trump-Vance transition team, wrote in an email.Here’s what workers need to know about the overtime proposal and what it could mean for their pocketbooks:
A bill already introduced in Congress, and some state action
Trump unveiled his tax-free overtime proposal on the campaign trail in September but didn’t offer details. “As part of our additional tax cuts, we will end all taxes on overtime,” he said at a rally in Tucson, Arizona. “If you’re an overtime worker, when you’re past 40 hours a week, your overtime hours will be tax-free,” Trump said.
There’s already a bill in Congress that was introduced in July by Congressman Russ Fulcher, a Republican from Idaho. The Keep Every Extra Penny (KEEP) Act has been referred to the House Committee on Ways and Means and also doesn’t have a lot of details beyond saying: ”Gross income shall not include overtime compensation required under section 7 of the Fair Labor Standards 9 Act of 1938.” There hasn’t been any further action on this bill since July.
There have been mixed results at the state level to exempt overtime pay from income tax. Alabama passed a bill in 2023 that temporarily exempts overtime pay from state income tax. It’s in effect for tax years that begin after December 31, 2023, and end prior to January 1, 2027. A similar effort proposed in Wisconsin stalled earlier this year. Hourly workers would receive most of the benefitMillions of American workers currently work overtime and could be impacted by a change in policy on how these earnings are taxed. This could translate into savings of a few hundred dollars to several thousand dollars for higher earners who put in a lot of overtime, tax policy professionals said.”It could be a fairly expansive policy in terms of who it could reach,” said Joseph Rosenberg, senior fellow at The Urban-Brookings Tax Policy Center. But it would also be very costly in terms of reducing revenue for the federal government, he added.
Department of Labor data show that there were 97.7 million employed workers last year who were eligible for FLSA-overtime protections. That represented 60% of household employment in 2023 and about two-thirds of wage and salary employment, according to a report from The Budget Lab at Yale, citing DOL data. Among these, 82.1 million were hourly workers and 15.6 million were salaried workers, the report said.
It’s important to note, however, that being eligible under FLSA doesn’t necessarily equate to actually working overtime. The Budget Lab noted that 7 million Americans regularly worked overtime last year; 6.4 million of these workers were hourly workers; while 600,00 were salaried. That translates to about 8% of hourly workers in the U.S. and about 4% of salaried employees who work FLSA-qualified overtime on a regular basis, according to John Ricco, associate director of policy analysis at The Budget Lab. Meanwhile, about 7% of hourly workers and 70% of salaried workers do not qualify for FLSA, the report said.
Cost to government could reach $3 trillion over decadeThe Tax Foundation estimates it could cost the federal government between $225 billion to slightly over $3 trillion over 10 years, depending largely on how Congress designs the law, Muresianu said.For example, would it be designed as just an income tax or would it be a payroll tax exemption as well? “A payroll tax exemption would reach lower down in the income distribution, but that has additional implications for the financing of Social Security and Medicare, as well as impacts on future benefits which are tied to the taxes that people pay on their income,” Rosenberg said.The hefty federal deficit could be a stumbling block to passing any number of Trump’s various tax proposals beyond extending the 2017 cuts. Extending the Trump tax cuts for the next 10 years — as Republicans have proposed — would add $4.6 trillion to the deficit, according to the nonpartisan Congressional Budget Office. Including all of the new tax cuts proposed could bring the total price tag to roughly $10 trillion over a decade, according to multiple estimates.
