No Tax on Tips and Overtime: Who Qualifies and How Much You Can Deduct
Short answer
For tax years 2025 through 2028, workers can deduct up to $25,000 of qualified tips and up to $12,500 of qualified overtime pay ($25,000 if married filing jointly) from their federal taxable income. Both deductions phase out above $150,000 of modified AGI ($300,000 joint), require a valid Social Security number, require married couples to file jointly, and are available whether or not you itemize. They reduce federal income tax only. Social Security and Medicare taxes still apply.
The new tips and overtime deductions are among the most-searched tax topics this year, and among the most misunderstood. “No tax on tips” does not mean tips are invisible to the IRS, and “no tax on overtime” does not mean your whole overtime check is tax-free. Here’s what the rules actually say, with examples you can check against your own pay stubs.
The rules side by side
| Tips deduction | Overtime deduction | |
|---|---|---|
| Years | 2025 through 2028 | 2025 through 2028 |
| Maximum deduction | $25,000 per year | $12,500 per year ($25,000 if married filing jointly) |
| Phase-out begins | Modified AGI over $150,000 ($300,000 joint) | Modified AGI over $150,000 ($300,000 joint) |
| What counts | Qualified tips in an occupation that customarily received tips on or before Dec. 31, 2024 | Only the premium portion of overtime required by the Fair Labor Standards Act |
| Social Security number | Required | Required |
| Married filing separately | Not allowed; must file jointly | Not allowed; must file jointly |
| Itemizing required? | No | No |
| Social Security and Medicare tax | Still applies | Still applies |
The tips deduction in detail
Who qualifies: employees and self-employed people who receive tips in occupations the IRS lists as customarily and regularly receiving tips. The IRS examples include wait staff, bartenders, salon workers, personal trainers, and gig workers.
What counts: qualified tips paid voluntarily by customers, including cash and card tips. Tips must be reported, either through your employer or on your own return.
Who doesn’t qualify: self-employed people in certain specified service fields, and employees whose employer is in one of those fields. For self-employed workers, the deduction can’t exceed the net income of the business where the tips were earned.
Example: A server in Queens
Maria is single and works as a server. Her wages are $32,000 and her reported tips are $21,000, for income of $53,000.
- Tips deduction: $21,000 (under the $25,000 cap)
- Standard deduction for 2026 (single): $16,100
- Federal taxable income: $53,000 − $16,100 − $21,000 = $15,900
Without the tips deduction her taxable income would be $36,900. She still owes Social Security and Medicare tax on all $53,000.
The overtime deduction in detail
This is where most people get it wrong. The deduction covers only the extra half in time-and-a-half, the premium the Fair Labor Standards Act requires. If your employer pays more than that (for example, double time), only the portion the law requires counts.
Starting with 2026, employers are required to report qualified overtime separately on your year-end wage statement. For 2025, many workers have to calculate it from pay stubs using their regular rate and hours over 40 per week.
Example: A warehouse worker with regular overtime
James earns $30 an hour and works 10 hours of overtime a week at $45 an hour, for 50 weeks.
- Total overtime pay: $45 × 10 × 50 = $22,500
- Premium portion (the extra $15 per hour): $15 × 10 × 50 = $7,500
- Overtime deduction: $7,500, not $22,500
The other $15,000 of his overtime pay is taxed like regular wages.
What these deductions don’t do
- They don’t reduce Social Security and Medicare taxes. Those still come out of every paycheck.
- They don’t automatically change your withholding. If you want less withheld, you generally need to give your employer an updated withholding form.
- They may not apply to your New York return. State rules can differ from federal rules, so ask your preparer how New York treats them.
Two other new deductions worth knowing
- Car loan interest: up to $10,000 a year of interest on a loan for a new vehicle with final assembly in the United States, for loans taken out after 2024. It phases out above $100,000 of modified AGI ($200,000 joint). Leases and used vehicles don’t qualify.
- Seniors 65 and older: up to $6,000 per person. See the new senior deduction.
What to do now
- Check that your tips are being reported through payroll.
- Save pay stubs that show overtime hours and rates.
- If you’re married, plan to file jointly. See married filing jointly vs. separately.
- Gather your documents with our tax documents checklist.
Work for tips or overtime?
We’ll calculate your deduction from your pay stubs and make sure you get the full amount.
Frequently asked questions
Is overtime completely tax-free now?
No. Only the extra “half” of time-and-a-half required by federal law counts as qualified overtime, up to $12,500 a year ($25,000 joint). The regular-rate portion of overtime pay is still taxable, and Social Security and Medicare taxes still apply to all of it.
Do I have to itemize to claim the tips or overtime deduction?
No. Both deductions are available whether you take the standard deduction or itemize.
Can married couples filing separately claim these deductions?
No. If you’re married, you must file a joint return to claim the tips or overtime deduction.
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