No Tax on Tips and Overtime: Who Qualifies, What You Save
"No tax on tips and overtime" is a deduction, not a tax exemption. See who qualifies, how the caps and income limit work, and what it saves with real examples.
By Muhammad AhmadPublished Last reviewed 10 min read
Not financial or tax advice. This guide explains how the numbers work, with examples. It cannot know your whole situation, so check big decisions with a licensed professional or the official source. See the disclaimer.
The quick answer
- It is a deduction, not an exemption. The new rules lower your federal income tax. Social Security and Medicare tax still apply to tips and overtime.
- Tips: deduct up to $25,000 a year of voluntary tips earned in an occupation on the IRS list, if the tips are reported.
- Overtime: deduct the premium part of required overtime pay, which is the extra half of time and a half, up to $12,500 a year ($25,000 on a joint return).
- Income limit: both deductions shrink by $100 for each $1,000 of income over $150,000 ($300,000 for a joint return).
- The rules cover tax years 2025 through 2028. You do not need to itemize, but married people must file jointly.
You will hear this called "no tax on tips" and "no tax on overtime." That is a catchy short name for two new federal deductions. They can save real money, but the wording leads people to expect more than the law gives. This guide explains each rule in plain language, with examples that show the tax you really save. The rules come from the IRS and the text of the law, and they apply to tax years 2025 through 2028.
To work out your own numbers, use the tips and overtime deduction calculator. It applies the caps and the income limit for you.
What changed
Congress added two deductions to the tax code in 2025. One is for qualified tips and one is for qualified overtime compensation. They reduce your taxable income, the number your federal income tax is figured on, so the saving is the deduction times your tax rate. They are not credits, and they do not make the pay itself tax-free. The IRS says they are yours to claim with the standard deduction too, so itemizing is not required. They run for tax years 2025 through 2028 and then end unless Congress extends them.
The tips deduction
- What counts. Voluntary cash or charged tips that customers give you, including tips that are shared among workers. A charge the customer must pay is not a voluntary tip.
- Which jobs. The tips must come from a job that was already a regular tipping occupation by the end of 2024. The IRS publishes the list of occupations.
- Reporting. The tips must appear on a Form W-2, a Form 1099 or Form 4137, the form workers use to report tips that were not on a W-2.
- The cap. Up to $25,000 a year. The cap does not change with your filing status and is not doubled for a couple.
- Self-employed workers can claim it too, but the deduction cannot be more than the net income of the business that earned the tips, and tips from a specified service trade or business generally do not qualify.
The overtime deduction
The law defines qualified overtime compensation as overtime pay that the Fair Labor Standards Act (section 7) requires on top of your regular rate. That sounds technical, but the idea is simple. If you earn $22 an hour and your overtime is paid at time and a half, the overtime rate is $33. Your regular rate is $22, so the part above it is $11 an hour, which is half of $22. Only that extra half is deductible, not the whole $33.
For 250 overtime hours, the deduction is $11 x 250 = $2,750. The other $5,500 you earned for those hours is regular pay and is taxed as usual.
If your employer pays double time, the IRS says only the portion the law requires counts. That is still the half-time part. So the deduction does not grow if your employer is more generous than the law requires. The cap is $12,500 a year, or $25,000 on a joint return. Salaried workers who are exempt from overtime do not qualify, because they have no required overtime pay.
The income limit
Each deduction is reduced when your modified adjusted gross income (MAGI) is above $150,000, or $300,000 on a joint return. The reduction is $100 for each $1,000 of income above the line, and it cannot take the deduction below zero. MAGI is your adjusted gross income with a few foreign income exclusions added back, so for most people it is the same as adjusted gross income.
| Income (MAGI), single or head of household | Tips deduction left | Overtime deduction left |
|---|---|---|
| $150,000 | $25,000 | $12,500 |
| $175,000 | $22,500 | $10,000 |
| $200,000 | $20,000 | $7,500 |
| $250,000 | $15,000 | $2,500 |
| $275,000 | $12,500 | $0 |
| $400,000 | $0 | $0 |
| Income (MAGI), married filing jointly | Tips deduction left | Overtime deduction left |
|---|---|---|
| $300,000 | $25,000 | $25,000 |
| $400,000 | $15,000 | $15,000 |
| $500,000 | $5,000 | $5,000 |
| $550,000 | $0 | $0 |
What it saves: four examples
The saving is the deduction times the rate in your top bracket. These examples use the 2026 federal tax tables and the standard deduction, with total income as MAGI.
| Example (2026 tax year) | Tips deduction | Overtime deduction | Federal tax saved |
|---|---|---|---|
| A server: $50,000 total income, $18,000 of tips, no overtime | $18,000 | $0 | $2,160 |
| An hourly worker: $62,000, no tips, 300 overtime hours at $26 | $0 | $3,900 | $468 |
| A bartender with overtime: $75,000, $6,000 of tips, 250 overtime hours at $22 | $6,000 | $2,750 | $1,900 |
| A couple filing jointly: $140,000, $9,000 of tips, 400 overtime hours at $30 | $9,000 | $6,000 | $2,500 |
The server in the first row has no overtime, so only the tips deduction applies: $18,000 less taxable income. The couple in the last row gets both deductions but each is well under its cap.
What a deduction is worth by tax bracket
| Your top tax bracket | A $5,000 deduction saves | A $10,000 deduction saves | A $25,000 deduction saves |
|---|---|---|---|
| 10% | $500 | $1,000 | $2,500 |
| 12% | $600 | $1,200 | $3,000 |
| 22% | $1,100 | $2,200 | $5,500 |
| 24% | $1,200 | $2,400 | $6,000 |
| 32% | $1,600 | $3,200 | $8,000 |
How it shows up in your pay
Your paycheck withholding is based on your Form W-4 and the IRS withholding tables, not on the new deductions. So the deduction usually shows up when you file, as a smaller tax bill or a larger refund. If you want more money in each paycheck, ask your payroll team how to adjust your W-4, or use the IRS Tax Withholding Estimator. For 2025 employers did not have to report qualified overtime separately, and for 2026 and later years they are required to, so your pay records and your W-2 will matter more.
How to claim the deductions
- Keep records. Pay stubs, your W-2 or 1099 and any Form 4137 show the tips and overtime.
- Use Schedule 1-A. The IRS created this schedule for Form 1040 for the new deductions. It walks through the caps and the income limit.
- Check the basics. You need a Social Security number that is valid for work. If you are married, you must file a joint return.
- If you have no statement of overtime, the Schedule 1-A instructions explain how to work out the amount from your pay records.
Common mistakes
- Thinking all overtime pay is deductible. Only the premium part is.
- Deducting a service charge or a tip that was not reported.
- Expecting Social Security and Medicare tax to go away. They do not.
- Forgetting the income limit when a spouse’s pay pushes the household over $300,000.
- Assuming your state follows the federal rule. Some states do, and some do not.
Frequently asked questions
Is overtime pay now tax-free?
No. A part of overtime pay, the premium above your regular rate, can be deducted from federal taxable income up to a cap. The rest of your overtime pay is taxed as normal, and Social Security and Medicare tax still apply to all of it.
Do I have to itemize to claim these deductions?
No. The IRS says they are yours to claim with the standard deduction too, so itemizing is not required.
What is the income limit?
The deductions shrink when MAGI is over $150,000, or $300,000 for joint filers, by $100 for each $1,000 over. A single filer with $25,000 of tips loses the whole tips deduction at about $400,000 of income.
Which jobs count for the tips deduction?
Jobs on the IRS list of occupations where tipping was already a regular practice by the end of 2024. The list covers many food service, hospitality, personal service and delivery jobs, among others. Check the IRS list for your job title.
Can I claim the deductions if I am married and file separately?
No. Married people must file a joint return to claim either deduction.
Do the deductions apply to my state tax?
Only if your state follows them. Many states start from your federal income, and each state decides whether to pass the deduction on. Check your state tax agency.
How long do the deductions last?
They apply to tax years 2025 through 2028. No deduction is allowed for a tax year that begins after December 31, 2028.
Does my employer have to tell me my qualified overtime?
For 2025 the IRS gave employers relief from separate reporting. For 2026 and later, employers must report qualified overtime separately. If you do not get a statement, the Schedule 1-A instructions show how to work out the amount.
The bottom line
The new tips and overtime deductions can lower your federal income tax by hundreds or thousands of dollars, but they are deductions, not tax-free pay. The amount depends on your tax bracket, the caps and your income. Count only the premium part of overtime, check that your job is on the tips list, keep your pay records and file jointly if you are married. Then run your numbers in the calculator.
Sources
- What the "No Tax on Tips" deduction means for you, Internal Revenue Service
- What to know about the No Tax on Overtime deduction, Internal Revenue Service
- Questions and answers about the new deduction for qualified overtime compensation, Internal Revenue Service
- Notice 2025-69, Guidance for individual taxpayers who received qualified tips or qualified overtime compensation, Internal Revenue Service
- 26 U.S. Code 224, Deduction for qualified tips, Legal Information Institute, Cornell Law School
- 26 U.S. Code 225, Deduction for qualified overtime compensation, Legal Information Institute, Cornell Law School
- Revenue Procedure 2025-32 (2026 inflation adjustments), Internal Revenue Service
The examples use the 2026 federal tax tables and the standard deduction, and treat total income as modified adjusted gross income. Real returns have more lines and your situation can differ. This is general information, not tax advice. Last reviewed October 21, 2026.
No Tax on Tips and Overtime Calculator
Work out the federal deductions for tips and overtime pay, after the caps and the income phase-out, and the income tax they save.
This guide is for education, not financial, tax or medical advice. See our editorial policy. Spotted a mistake? Tell me.