No Tax on Tips and Overtime (2025–2028): Complete Guide

For tax years 2025–2028 you may deduct up to $25,000 of qualified tips and up to $12,500 of qualified overtime premium ($25,000 on a joint return). Both shrink by $100 per full $1,000 of MAGI above $150,000 ($300,000 joint). They don't reduce AGI or payroll taxes, and married filing separately can't claim them.

Last reviewed September 23, 2026

"No tax on tips" and "no tax on overtime" are the popular names for two new federal income tax deductions. The One Big Beautiful Bill Act added them to the tax code as IRC §224 (qualified tips) and IRC §225 (qualified overtime compensation). They apply to tax years 2025 through 2028.

The names promise more than the law delivers. Your tips and overtime are still taxed. What changed is that you may be able to deduct some of that income when you work out your federal income tax. This guide explains who qualifies, how much you can deduct, what the deductions don't cover and how to get the paperwork right.

If you want your own numbers first, the free Tips & Overtime Deduction Calculator applies the caps and phase-outs for tax years 2025 and 2026 in about a minute.

What are the "no tax on tips" and "no tax on overtime" deductions?

They are two separate deductions that you claim on Schedule 1-A of Form 1040:

• Qualified tips deduction (IRC §224). You may deduct voluntary tips you received in an occupation that customarily and regularly received tips on or before December 31, 2024.
• Qualified overtime deduction (IRC §225). You may deduct the premium portion of overtime pay that the Fair Labor Standards Act (FLSA) requires. That is usually the extra "half" in time-and-a-half, not your whole overtime paycheck.

Both deductions are temporary. The statute says neither applies to tax years beginning after December 31, 2028.

A deduction lowers your taxable income. It is not a refund of every dollar you earned in tips or overtime. A $10,000 deduction saves you $10,000 multiplied by your tax rate on that income. For someone in the 12% bracket, that is about $1,200.

How much can you deduct?

Here are the limits, taken from the statute and the IRS's 2025 Schedule 1-A.

Two details catch people out:

1. The $25,000 tips cap is per return, not per person. A married couple who both earn tips still share one $25,000 cap on their joint return. The overtime cap is different: it doubles to $25,000 on a joint return.
2. You can claim both. A bartender who also works overtime can claim the tips deduction and the overtime deduction, each under its own cap. Qualified tips cannot also be counted as qualified overtime.

Who qualifies for the tips deduction?

You generally qualify if all of these are true:

• You have a valid, work-authorized Social Security number on your return, issued before the return's due date. An ITIN is not enough.
• If you are married, you file a joint return. Married filing separately cannot claim it.
• Your tips are "qualified tips." They are voluntary cash or charged tips that the customer decides the amount of. They are not negotiated and not required. A mandatory service charge (for example, an automatic 18% added to large-party bills) is not a qualified tip.
• Your occupation customarily and regularly received tips on or before December 31, 2024. Treasury published a proposed list of eligible occupations (REG-110032-25, 90 FR 45340, September 19, 2025). IRS Notice 2025-69 says taxpayers may rely on that proposed list until final regulations are issued, if they follow the proposed regulations in full and consistently.
• The tips were reported on a Form W-2, Form 1099 or your own Form 4137.
• The tips were not received in a "specified service trade or business" (SSTB). For employees, the employer's business is what's tested. Notice 2025-69 gives transition relief here, explained in our post on who qualifies for the tips deduction.

Self-employed? Your tips count only up to the net profit of the business in which you earned them. If your business shows a loss, the tips from it don't create a deduction.

Who qualifies for the overtime deduction?

The overtime deduction is narrower than most headlines suggest. You generally qualify if:

• You are "non-exempt" under the FLSA. In practice, that usually means hourly workers who must be paid overtime for hours over 40 in a workweek. Most salaried "exempt" employees have no qualified overtime.
• The overtime was required by FLSA section 7. Overtime paid only because of a state law, a union contract or a company policy does not qualify. That includes daily overtime that federal law doesn't require, or weekend premiums.
• You deduct only the premium. If your regular rate is $20 an hour and you are paid $30 for an overtime hour, only $10 is qualified overtime. The other $20 is your regular pay for that hour.
• You meet the same SSN and joint-return rules as for tips.

We go through the math, including double time, in What Counts as Qualified Overtime?.

Why is only the "half" of time-and-a-half deductible?

Because the law only covers the part of overtime pay "in excess of" your regular rate that the FLSA requires. The FLSA requires at least 1.5 times the regular rate for hours over 40. The "1" is ordinary pay. The "0.5" is the premium.

If your pay stub shows only your total overtime pay, IRS Notice 2025-69 gives reasonable methods for tax year 2025:

The double-time line surprises people. If your employer pays double time, the law still only covers the 0.5x premium the FLSA requires. The extra 0.5x that your employer chose to pay is not qualified overtime.

For tax year 2026 and later, employers are expected to report qualified overtime on the W-2 in box 12 with code TT. That should make the number easier to find.

How does the income phase-out work?

Each deduction is reduced by $100 for every full $1,000 of modified adjusted gross income (MAGI) above $150,000 ($300,000 on a joint return). A partial $1,000 is dropped. The 2025 Schedule 1-A tells you to divide the excess by $1,000 and round down to the next whole number.

For most people, MAGI is the same as AGI. It adds back certain foreign income exclusions (IRC §§911, 931 and 933).

The reduction applies to the capped amount. Some examples for a single filer, worked out with our calculator:

The same single filer at $162,500 MAGI with a $12,500 overtime premium would see that deduction fall to $11,300.

Do these deductions reduce Social Security and Medicare tax?

No. This is the most common misunderstanding. Tips and overtime remain subject to Social Security and Medicare (FICA) tax. The employee share for 2026 is 7.65%: 6.2% Social Security (up to the wage base) and 1.45% Medicare. If you are self-employed, self-employment tax still applies to your tips.

The deductions only affect federal income tax. They also don't change your paycheck withholding by themselves. If you want more take-home pay during the year, you could review your Form W-4 with a professional.

Do the deductions reduce AGI or state tax?

AGI: No. These are "below-the-line" deductions. You take them on top of the standard deduction (you don't need to itemize), but they don't lower your adjusted gross income. Anything else on your return that depends on AGI stays where it was.

State income tax: These are federal deductions. Many states do not follow them, so your state tax may not change. Check your state's rules or ask a preparer.

How much could you actually save?

Your saving is roughly the deduction multiplied by your federal income tax bracket. These scenarios were run through our calculator. They assume MAGI is all wages, the standard deduction and no credits. They are illustrations, not predictions for any real person.

Notice the warehouse worker. $9,000 of overtime pay becomes a $3,000 deduction and a saving of about $360. That's real money, but far from "no tax on overtime."

What paperwork do you need?

For tax year 2025 (returns filed in 2026): The 2025 W-2 and 1099 forms did not change. Notice 2025-62 gave employers penalty relief for not separately reporting tips and overtime for 2025. Employers were encouraged to share the amounts in W-2 box 14, through an online portal or on a separate statement. If your employer didn't, Notice 2025-69 lets you use reasonable methods:

• Tips: W-2 box 7 (Social Security tips), tips you reported to your employer on Form 4070, an amount your employer voluntarily gave you in box 14 or a separate statement, plus unreported tips you reported yourself on Form 4137 line 4.
• Overtime: a year-end statement that shows the FLSA premium separately, or one of the divide-by-3 or divide-by-4 methods in the table above, or another reasonable method based on pay stubs.

Keep copies of whatever you rely on. The IRS expects you to be able to support the deduction.

For tax year 2026 (returns filed in 2027): New boxes and codes appear on the forms:

Employers: our post on tips and overtime reporting for employers covers what changes on your side.

Can you claim the senior deduction too?

Yes, if you qualify. Schedule 1-A also holds the new $6,000 deduction for people aged 65 or older ($12,000 if both spouses qualify on a joint return). It also runs from 2025 to 2028. It has its own phase-out: it is reduced by 6% of MAGI over $75,000 ($150,000 joint), and married filing separately can't claim it. An older restaurant worker could claim the tips deduction and the senior deduction on the same return.

What are the most common mistakes?

1. Deducting all overtime pay instead of the premium. Only the FLSA-required "half" counts.
2. Counting state or contract overtime. If federal law didn't require it, it doesn't qualify.
3. Counting service charges as tips. Mandatory charges are not qualified tips.
4. Filing separately while married. Married filing separately cannot claim either deduction.
5. Expecting lower payroll taxes. FICA and self-employment tax are unchanged.
6. Doubling the tips cap on a joint return. The $25,000 tips cap is per return.
7. Forgetting the phase-out rounding. Only full $1,000 steps reduce the deduction.
8. Not keeping records. Save pay stubs, tip reports and any employer statements.

When should you get help?

Many people can claim these deductions on their own with good records. It may be worth talking to a professional if you:

• had several employers, or a mix of W-2 and 1099 work,
• are self-employed and received tips,
• aren't sure whether your job is on the tipped-occupation list or whether you're FLSA non-exempt,
• have MAGI near or above the phase-out thresholds, or
• didn't claim the deduction on a 2025 return you already filed.

RAHA Financials offers a fixed-price Tax Return with Tips & Overtime Deductions service, quoted upfront. It covers a review of your W-2 and pay records, the cap and phase-out math, and preparation and e-filing of your federal return (plus your state return where required). Start with a free consultation or see our tax filing services.

Restaurant, bar or hotel owner? See our hospitality accounting page and payroll processing.

Frequently asked questions

Are tips tax-free starting in 2025?

Not exactly. Qualified tips may be deductible up to $25,000 per return for tax years 2025–2028, which lowers your federal income tax. Tips are still reported as income and still subject to Social Security and Medicare tax.

Is all overtime tax-free now?

No. Only the premium portion that the FLSA requires, usually the "half" of time-and-a-half, is deductible, up to $12,500 ($25,000 joint). Your regular pay for overtime hours is taxed as usual, and payroll taxes still apply.

Do I have to itemize to claim the tips or overtime deduction?

No. You can claim both deductions on Schedule 1-A and still take the standard deduction.

Can I claim the deductions if I'm married filing separately?

No. Married taxpayers must file a joint return to claim either deduction.

I have an ITIN, not an SSN. Can I claim the deduction?

No. The law requires a valid Social Security number that authorizes work and was issued before your return's due date. An ITIN does not qualify.

Do the deductions lower my state income tax?

Not necessarily. They are federal deductions. Many states do not follow them, so check your state's rules.

How do I find my qualified overtime if my pay stub only shows total overtime?

For tax year 2025, Notice 2025-69 lets you divide total overtime pay by 3 if you were paid at 1.5x, or by 4 if you were paid at 2x. For 2026, look for W-2 box 12 code TT.

Which years do these deductions cover?

Tax years 2025, 2026, 2027 and 2028. Unless Congress extends them, they end after 2028.

Sources

• IRC §224, qualified tips: https://www.law.cornell.edu/uscode/text/26/224
• IRC §225, qualified overtime compensation: https://www.law.cornell.edu/uscode/text/26/225
• IRC §63 (deductions for non-itemizers): https://www.law.cornell.edu/uscode/text/26/63
• IRC §151 (senior deduction): https://www.law.cornell.edu/uscode/text/26/151
• 2025 Schedule 1-A (Form 1040): https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf
• IRS Notice 2025-69: https://www.irs.gov/pub/irs-drop/n-25-69.pdf
• IRS Notice 2025-62: https://www.irs.gov/pub/irs-drop/n-25-62.pdf
• IRS Publication 15 (2026), Employer's Tax Guide: https://www.irs.gov/pub/irs-pdf/p15.pdf
• 2026 Form 1040-ES: https://www.irs.gov/pub/irs-pdf/f1040es.pdf
• Instructions for Forms 1099-MISC and 1099-NEC: https://www.irs.gov/pub/irs-pdf/i1099mec.pdf

This guide provides general information for educational purposes and is not tax, legal or accounting advice. Consult a qualified professional before acting.