Donald Trump’s recently enacted tax law should come as no surprise to American workers. It outlines major provisions aimed at reforming the dollar and cents equation for workers and companies alike. The 88-page law passed largely under the radar during Memorial Day weekend. It adds deductions for tips received, child care expenses, and paying off student debt. These changes are almost exclusively related to federal taxes. These changes phased in over the next several years, with some provisions phasing out by 2028.
The law permits workers who make qualified tips to exclude up to $25,000 of their taxable income each year. This important provision will be a game changer for millions of service employees. These workers cannot afford not to have tips count as part of their income. The legislation posits an income limit for a size deduction. People making less than $150,000 and joint filers making less than $300,000 are eligible for an array of tax credits.
Key Provisions of the Tax Law
One of the most egregious aspects of Trump’s tax law is the provision that allows businesses a deduction for tipped income. Starting in the 2025 tax year, qualified workers can deduct a portion of their tips from taxable income, providing immediate financial relief.
This law gives businesses the ability to deduct 40% of their qualified child care expenses. This robust benefit, limited to a maximum of $500,000, will begin phasing in beginning with the 2026 tax year. Small businesses will experience even larger impacts. For the first time ever they can deduct a percentage of their qualified expenses, up to 50% capped at $600,000.
“Not all employers only pay overtime on a federal level, which requires time and a half after 40 hours worked,” – Nisha Verma, partner at Dorsey & Whitney’s labor and employment practice.
The purpose of this provision is two fold, to provide relief to working parents and to incentivize companies to invest in child care programs. Yet, historically, these benefits have accrued only to larger firms. Only about 300 companies claimed the credit for employer-provided child care in 2016. This implies that smaller businesses will find it almost impossible to utilize this key advantage.
Implications for Overtime Compensation
The other main provision of the law, and perhaps the most important, is requiring pay for overtime work. The new legislation allows workers earning under $150,000 (or $300,000 for joint filers) to deduct up to $12,500 in qualified overtime compensation from their taxable income. This provision is extremely important. With a tipped minimum wage of only $2.13 an hour, questions have been raised as to whether or not many workers in the service industry are able to make a livable wage.
“Most wage statements that I’ve seen do not pull apart or designate whether an hour is being paid to you because you hit more than eight hours a day or because you hit more than 40 hours a week,” – Nisha Verma.
This ambiguous legally required wage statement removes transparency in the wages, making tracking and paying for overtime more difficult. The overtime exemption provision has no expiration date at all. This deadline has led to passionate and robust conversations about how to win future protections for hourly workers.
The holiday weekend passage of the law drew immediate criticism. Many workers are understandably concerned with the lack of transparency and their overall grasp of these changes. Advocates contend that though some components look good on paper, they do not tackle the root problems many tipped workers encounter.
“Yes, the person’s getting a benefit by not having to pay taxes on their tips, but there’s other challenges that come along with relying on tips for your income,” – Nisha Verma.
Student Loan Repayment Assistance and Broader Context
Not only does Trump’s tax law retroactively cover tips and overtime, it makes a big, retroactive gift to employers. They’re now able to provide up to $5,250 in tax-free student loan repayment assistance and this provision is permanent. This benefit will be indexed to inflation starting in 2026, so it won’t lose value as the years go by.
Access to this so-called benefit is not equitably distributed across income brackets. New data reveals that just 9% of workers in the top quarter of earners have access to student loan repayment benefits. By comparison, only 3% of those in the lowest quartile are beneficiaries of these programs. This gap is a reflection of the persistent inequities facing women in the workforce.
“You may be reading about this in the news and you see, no tax on tips and think, ‘That seems great for me,’ and you’re not taking the time to think about… I already wasn’t paying federal income tax on my tips,” – Martha Gimbel.
As these new provisions roll out, discussions are likely to continue about their long-term impact on workforce dynamics and employee rights. As you can imagine, many experts are very concerned. While they find some monetary benefits impressive on paper, they’re not addressing more pernicious issues such as job stability and harassment at work.