3 Income Tax Cuts Highlighted in Trump’s Address to Congress

Several types of earnings would no longer be taxable for income tax purposes, according to plans put forth by President Trump.

In his address to a joint session of Congress on March 4, 2025, Trump called for tax cuts that would provide relief for working Americans — and those in retirement, too.

As he’s done on other occasions, during his Congressional address, he stated that there should be no tax on:

• Tips
• Overtime, and
• Social Security.

Here’s a closer look at that list and the changes that could be coming.

‘No Tax on …’

1. Tips

If the President’s plan is implemented, tipped workers would be able to keep more of their hard-earned money in their pockets.

That’s an incentive many job-seekers wouldn’t want to pass up. As a result, the restaurant industry, with its heavy dependence on tipped workers, stands to benefit from tips becoming nontaxable for federal purposes. The same goes for the beauty industry — and the list continues.

Regardless of what’s due to the IRS — under the current rules or future ones — employers still need to follow the Fair Labor Standards Act (FLSA) requirements when it comes to paying tipped wages.

The FLSA says tipped workers must receive a cash wage of at least $2.13 per hour. Given that the federal minimum wage is $7.25 per hour, employers can claim a tip credit of $5.12 per hour, maximum.

2. Overtime

Hourly workers in a broad range of industries would have more take-home pay in their paychecks, if overtime pay switches to nontaxable.

Remember, the FLSA says that when a nonexempt employee works more than 40 hours in a workweek, an employer must pay that person time-and-a-half his or her regular rate of pay — that’s not changing.

But a more favorable tax treatment of overtime could motivate some nonexempt employees to put in longer shifts, which would in turn help employers as they try to manage the workforce and increase productivity.

Side benefit: Would employees who get to keep more of their gross pay then decide to contribute a higher percentage of each paycheck to employer-sponsored retirement plans? That’s something to watch.

3. Social Security

Currently, a portion of monthly retirement benefits received from SSA is subject to income tax, depending on an individual’s income level and filing status.

Indeed, up to 85% of a retiree’s benefits may be taxable.

But Trump wants seniors to keep all of their Social Security benefits, instead of having to pay income tax on a portion of the amount received.

Employers who have workers near — or beyond — retirement age on the payroll will want to keep an eye on this measure. The changes may impact some individuals’ decision-making about partial and/or full retirement.

Payroll Impact

Employers would need to update their payroll systems to account for any finalized changes. The difficulty of that, of course, depends on factors such as how your payroll system is set up and what kind of tech infrastructure you have.

Take overtime, for example. You likely already have a code in place for that type of earnings, enabling you to pay the proper pay rate to nonexempt employees whose hours go beyond 40 in a workweek. With overtime wages already identified in your system, you could hit the ground running if overtime pay becomes excludable from income on the federal level.

Furthermore, at year-end, the earnings to include in box 1 of Form W-2 would change. That’s the box that asks employers to report wages, tips and other compensation to the IRS. Note: No changes have been proposed regarding Social Security and Medicare, so you’d continue to withhold those taxes and then report them in the appropriate boxes on W-2s.

Future of the Tax Brackets

Also in the March 2025 address to Congress, Trump discussed the Tax Cuts and Jobs Act (TCJA). With many provisions of that 2017 law set to expire at the end of 2025, Americans could be surprised at the increase in their withholding in 2026.

Many people, including Trump, want to make some TCJA provisions permanent. Keeping the current tax brackets is one example. If that doesn’t happen, the individual rates in place in 2025 — 10%, 12%, 22%, 24%, 32%, 35% and 37% — will return to their previous levels.

For more information about upcoming changes, check out the audio recording of this HRMorning webinar: Trump’s Payroll Policies: Preparing for Tax Reforms, Labor Law Updates, and Compliance Challenges.