Legislators in 19 different states have proposed eliminating taxes on overtime, and the removal of taxes on tips is being considered in several states as well. These proposals are designed to assist low- and middle-income earners and are gaining traction following recent federal discussions aimed at creating a framework for similar deductions from federal taxes.
As of this writing, federal legislation is still under consideration and has not yet been signed into law.
The responses to these proposals have been mixed, leaving many workers and employers uncertain about the actual impact on their organizations. This is particularly true for nonprofits, which enjoy some tax exemptions but may still see their operations, staffing models, and scheduling priorities shift under these new tax policies.
At first glance, these proposals appear to target service and blue-collar professionals. However, the question of untaxed overtime could also create pressures within nonprofits, which are often made up of salaried employees. Here are some considerations and potential impacts for your organization:
What About Our Tax-Exempt Status?
Being tax-exempt does not mean exemption from payroll taxes. 501(c)(3) organizations that employ workers who earn tips or overtime would still be affected by this kind of tax change.
Most of Our Employees Are Salaried. Does This Affect Us?
Many nonprofits pay their staff a set salary, regardless of hours worked. However, if overtime pay becomes untaxed, those extra hours will be worth even more than the traditional taxed “time and a half” rate.
This could influence salaried employees, especially in mission-driven roles, to reevaluate whether remaining salaried is the best option. Some may feel they are missing out on additional pay for the extra hours they already work.
Organizations with a mix of salaried and hourly employees may face new tensions. Hourly workers earning untaxed overtime could potentially out-earn salaried colleagues, creating internal pressures or dissatisfaction around pay equity.
What About Scheduling and Workload?
These changes could also shift how overtime is scheduled and prioritized. Nonprofits often operate outside the standard 9-to-5 schedule. Grant deadlines, fundraising events, and emergency responses frequently require extra hours.
Under this new framework, nonprofits might see an opportunity to provide additional income to their hourly staff without increasing organizational costs. This could help with retention since underpayment is consistently one of the top reasons nonprofit employees leave their roles.
However, these policies could also unintentionally promote overwork, worsening burnout—a leading cause of turnover in the nonprofit sector. Additional complications could arise if employees feel that overtime opportunities are not fairly distributed or are influenced by favoritism.
We Don’t Have Hourly Employees or Take Tips. Can We Ignore This?
Even if your organization is entirely salaried, shifts in the broader labor market could still affect you. Roles that offer hourly wages with access to untaxed overtime may become more attractive to some job seekers than traditional salaried positions. This could create upward pressure on wages for nonprofits that currently offer primarily salaried roles.
Some critics of these tax proposals have suggested that employers might view untaxed overtime as a substitute for raises, potentially freezing or even reducing base wages over time. This concern applies both in tipped and non-tipped roles.
Are There Other Nonprofit-Specific Effects?
Another important consideration is the potential for reduced state and federal tax revenues if these proposals move forward. Reduced revenue could lead to cuts in public services and programs, including grants and contracts that many nonprofits rely on.
According to Candid, roughly one-third of nonprofits receive some form of government grant, and half of larger nonprofits receive a portion of their funding from government sources. Any shift in tax revenue could ultimately put pressure on these funding streams and increase reliance on private donations and philanthropy.
As policies like these continue to evolve, nonprofit leaders must remain adaptable and informed. Whether or not these proposed tax changes directly affect your organization today, their ripple effects could shape the nonprofit workforce and funding landscape for years to come. Staying ahead of these shifts will allow your organization to better support your employees, remain competitive in hiring, and keep your focus where it belongs: on your mission and the communities you serve.
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The information contained in this article is not a substitute for legal advice or counsel and has been pulled from multiple sources.
