The Rules at a Glance
| Tips | Overtime | |
|---|---|---|
| Most you can deduct | $25,000 | $12,500 ($25,000 joint) |
| What counts | Voluntary tips in a listed occupation | The half-time premium the FLSA requires |
| Shrinks above (modified AGI) | $150,000 single, $300,000 joint: $100 less per $1,000 | |
| Years | 2025 through 2028 | |
| Who can claim | Anyone with a valid SSN; married couples must file jointly | |
| Doesn't reduce | Social Security or Medicare; many states don't follow it for state income tax | |
What It's Worth: Examples for 2026
- A server, single, earning $45,000 including $12,000 in tips: federal income tax falls from $3,220 to $1,780, a saving of $1,440. Social Security and Medicare on the tips, $918, are still owed.
- A married warehouse worker with two children, $85,000 of household wages and 300 overtime hours at a $25 regular rate: the premium is $3,750, and the deduction saves $450.
- A higher earner, single at $170,000 with $10,000 of overtime premium: the phase-out trims the deduction to $8,000, which saves $1,920.
The saving is your tax bracket times the deduction, so a worker in the 10% or 12% bracket saves 10 or 12 cents per dollar of tips or overtime premium, and nothing if the standard deduction and credits already wipe out their tax.
Only the Premium Counts for Overtime
If your regular rate is $20, an overtime hour pays $30. Only the extra $10 is the premium you can deduct; the $20 is regular pay. That's why the calculator asks for hours and your regular rate, or divides total overtime pay by three. Overtime that only a state law or your employer's policy requires, such as daily overtime or double time, doesn't count beyond the federal half-time premium.
Getting It in Your Paycheck
Employers still withhold federal tax as if you take only the standard deduction, so by default the saving arrives as a bigger refund. To spread it across your paychecks, put the deduction you expect in Step 4(b) of a new Form W-4. The W-4 calculator works out the exact entry, and the tax refund calculator shows your whole return with these and the senior and car loan deductions. For overtime pay itself, see the overtime calculator.
Frequently Asked Questions
Are tips tax-free now?
Not entirely. For 2025 through 2028 you can deduct up to $25,000 of qualified tips from your income for federal income tax, which saves your tax rate on them (often 10% or 12%). Social Security and Medicare taxes still apply, and many states still tax tips.
Is overtime tax-free now?
Only the premium part, and only for federal income tax. You can deduct the extra half of time-and-a-half, up to $12,500 a year ($25,000 on a joint return), for 2025 through 2028. The regular-rate part of your overtime pay is taxed as usual, and Social Security and Medicare apply to all of it.
Which overtime counts?
Overtime the Fair Labor Standards Act requires: time-and-a-half for hours over 40 in a workweek for non-exempt employees. Overtime paid only because of a state law, a union contract or an employer policy (daily overtime, double time, holiday pay) doesn't count beyond the federal half-time premium.
Which tips count?
Voluntary cash or card tips received in an occupation on the IRS list of jobs that customarily got tips before 2025, including tips shared through a tip pool. Mandatory service charges and automatic gratuities don't count, and neither do tips in certain specified service businesses such as health, law or financial services.
Can I take these deductions if I take the standard deduction?
Yes. Both are claimed on Schedule 1-A on top of the standard deduction or itemized deductions. You need a valid Social Security number, and married couples must file jointly.
Do the deductions phase out?
Yes. Each shrinks by $100 for every full $1,000 of modified AGI above $150,000 ($300,000 on a joint return). A single filer with $170,000 of income and $10,000 of overtime premium can deduct $8,000.
Will my paycheck be bigger?
Not automatically. Employers still withhold as if you take only the standard deduction. To get the benefit in each paycheck instead of at tax time, add the deduction you expect to Step 4(b) of a new Form W-4; the 2026 W-4 has a worksheet line for tips and overtime.