No Tax on Tips and Overtime: How the 2025-2028 Deductions Work

For tax years 2025 through 2028, many workers can deduct part of their tips and overtime pay. These are new deductions created by the One Big Beautiful Bill Act. They lower federal income tax, but they do not remove tips or overtime from your income entirely, and they do not reduce Social Security or Medicare tax.

The deduction for tips

• Up to $25,000 per return of qualified tips each year.
• Voluntary tips only. Cash and card tips that customers choose to leave count. Automatic service charges added to the bill do not.
• Tipped occupations. The tips must come from a job that customarily received tips before 2025. Treasury published the list of qualifying occupations, including restaurant, bar, hospitality, personal care, and many service jobs.
• Self-employed workers qualify too, unless the business is a specified service business such as health, law, accounting, or consulting.

The deduction for overtime

• Up to $12,500 a year, or $25,000 for married couples filing jointly.
• Only the extra half counts. The deduction covers the premium portion of overtime required by the Fair Labor Standards Act, the "half" in time and a half. It does not cover your regular hourly rate for those hours.
• FLSA overtime only. Extra pay that is only required by a union contract or company policy, beyond what federal law requires, generally does not qualify.

For example, an hourly worker who earns $30 an hour and works 200 overtime hours at $45 an hour can deduct the $15 premium for each hour, or $3,000. The other $6,000 is taxed as usual.

Income limits

Both deductions shrink by $100 for every $1,000 of modified AGI above $150,000, or $300,000 for joint filers. They phase out completely at higher incomes.

Who can claim them

• You need a valid Social Security number.
• Married couples must file jointly. Married filing separately does not qualify.
• You claim the deductions on Schedule 1-A of Form 1040, whether you itemize or take the standard deduction.

The deductions reduce taxable income, not adjusted gross income. That means they do not help you qualify for other benefits that depend on AGI.

Records you need

Starting with 2026, employers report qualified tips and overtime separately on Form W-2. For 2025, the IRS allowed transition methods because many employers had not yet changed their payroll systems. Keep your pay stubs and, if you are tipped, your own tip records, so you can support the amount you claim.

For employers

Business owners with tipped or hourly staff should confirm that payroll codes tips and FLSA overtime correctly. Employees will expect the right numbers on their W-2s. Our payroll and HR compliance team can review your setup, and our individual and family tax team prepares returns that claim these deductions.

Frequently asked questions

Are tips still subject to Social Security and Medicare tax?

Yes. The deduction only reduces federal income tax. Payroll taxes still apply to all tips and overtime pay.

Do automatic service charges count as tips?

No. A mandatory service charge added to a bill is not a tip, even if it is paid to the worker. Only amounts the customer chooses to give count.

Can self-employed workers claim the tips deduction?

Yes, if they work in an occupation on Treasury's list and their business is not a specified service business such as health, law, accounting, or consulting.

Does overtime count if I am a salaried employee?

Usually not. Employees who are exempt from federal overtime rules are not paid FLSA overtime, so there is no qualifying premium to deduct.

Are these deductions permanent?

No. Both deductions apply to tax years 2025 through 2028 only, unless Congress extends them.