No Tax on Tips & Overtime Calculator

What changed: four new deductions for 2025–2028

Public Law 119-21 — passed in July 2025 and widely called the One Big Beautiful Bill Act; the IRS now calls the package the "Working Families Tax Cuts" — created four temporary federal income tax deductions for tax years 2025–2028:

They're not itemized deductions: you can take them on top of the standard deduction. They're claimed on a new form, Schedule 1-A, and they reduce taxable income — not your adjusted gross income (AGI), and not Social Security or Medicare tax.

No tax on tips: who qualifies and what counts

You can deduct up to $25,000 of qualified tips a year. The cap is per return, so a married couple filing jointly still has a $25,000 limit in total. To count, tips must be:

• Earned in a listed occupation. Treasury's final regulations (April 2026) list occupations that customarily received tips before 2025, each with a three-digit Treasury Tipped Occupation Code. The IRS list has 71 codes across eight groups — food and beverage service, entertainment and events, hospitality, home services, personal services, personal appearance and wellness, recreation and instruction, and transportation and delivery (including rideshare drivers and delivery workers).
• Voluntary. The customer must be free to leave nothing. An automatic 18% large-party charge is a service charge, not a tip.
• Cash or a cash equivalent — cash, checks, cards, gift cards or payment apps. Digital assets don't count.
• Reported — on your W-2, a Form 1099, or by you on Form 4137. Tips shared through a tip pool count, except amounts a manager or supervisor receives.

Self-employed and gig workers in listed occupations qualify too, but the deduction can't exceed the net profit of the business where the tips were earned.

No tax on overtime: only the extra half

The overtime deduction is narrower than its name. It covers only the premium the Fair Labor Standards Act (FLSA) requires — the extra half of time-and-a-half for hours over 40 in a workweek — not your whole overtime paycheck. The cap is $12,500, or $25,000 on a joint return.

Overtime hours over 40 a week × ½ × regular rate = the deductible premium

Example: 5 overtime hours a week at a $30 regular rate, 50 weeks → 5 × $15 × 50 = $3,750 deductible, even though overtime pay was $11,250.

• Double time: only the FLSA half counts. If you're paid $60 instead of $30 an hour for an overtime hour, $15 counts, not $30.
• State or contract overtime doesn't count unless federal law also requires it — for example, California's daily overtime after 8 hours, in a week under 40 hours.
• Exempt (salaried) employees have no qualified overtime, even if their employer pays extra for long weeks.

How to find your qualified overtime

• 2026 onward: your W-2 shows it in box 12, code TT. Employers report the full amount, even above the cap.
• 2025: employers didn't have to report it separately. If you didn't get a statement, Notice 2025-69 lets you use ⅓ of total time-and-a-half overtime pay or ¼ of total double-time pay. Pick the matching option in the calculator.
• If your W-2 overstates it, only the amount actually paid counts; employers fix errors with Form W-2c.

Not sure what you earn in overtime? Use the overtime calculator to split a week into regular pay and the premium.

Income limits and phase-outs

The tips and overtime deductions shrink by $100 for each full $1,000 of modified AGI over $150,000 ($300,000 joint). Modified AGI is your AGI plus a few rarely-used foreign income exclusions — for most workers, it's simply AGI.

Deduction = smaller of (your amount, cap) − $100 × whole thousands over the threshold = allowed deduction

Example: single, MAGI $162,500, $10,000 of tips → $12,500 over → 12 full thousands → $1,200 off → $8,800 deduction.

Senior and car loan interest deductions

Seniors: each person 65 or older (born before January 2, 1962 for 2026) can deduct an extra $6,000 — $12,000 if both spouses qualify — on top of the existing additional standard deduction for age. Each $6,000 shrinks by 6% of modified AGI over $75,000 ($150,000 joint).

Car loan interest: up to $10,000 a year of interest on a loan taken out after 2024 to buy a new car, SUV, van, pickup or motorcycle for personal use, with final assembly in the United States and secured by the vehicle. Leases and used vehicles don't qualify, and you'll need the VIN on your return. It shrinks by $200 for each $1,000 (or part) of modified AGI over $100,000 ($200,000 joint).

How to claim: Schedule 1-A and the new W-2 codes

• File Schedule 1-A (Form 1040) — Part II for tips, Part III for overtime, Part IV for car loan interest, Part V for seniors. The total goes on Form 1040 (line 13b on the 2025 form; the 2026 draft points to line 13a).
• You need a Social Security number valid for employment, and married couples must file jointly.
• From the 2026 tax year, your W-2 shows tips in box 12 code TP, your occupation code in box 14b, and qualified overtime in box 12 code TT.

Getting the money in your paycheck now (W-4)

Payroll doesn't apply these deductions automatically — the 2026 withholding tables don't include them. If you expect to qualify, the 2026 Form W-4 has a Step 4(b) worksheet with lines for tips (1a), overtime (1b), car loan interest (1c) and the senior deduction (3a/3b). Entering the total in Step 4(b) lowers your withholding during the year instead of waiting for a refund. Our paycheck calculator accepts a Step 4(b) amount so you can see the effect.

What these deductions don't reduce

• Social Security and Medicare. Tips and overtime are still subject to FICA (7.65% for employees). Self-employment tax isn't reduced either.
• Your AGI. Because they come after AGI, they don't help with other AGI-based limits.
• Most state income taxes. States decide for themselves. Ballotpedia counted 19 of the 41 states with a broad wage tax as conforming to the tips deduction by late May 2026. Check your state's revenue department — and see your state paycheck page for the rest of your state's rules.

Worked examples (2026 rules)

Tax saved depends on your top bracket: a $10,000 deduction is worth $1,200 in the 12% bracket and $2,200 in the 22% bracket.

Common mistakes

1. Deducting all overtime pay. Only the half-time premium counts.
2. Counting service charges as tips. If the customer couldn't remove it, it isn't a tip.
3. Filing separately. Married filing separately rules out the tips, overtime and senior deductions.
4. Expecting a smaller FICA bill. Social Security and Medicare don't change.
5. Assuming your state follows. Many don't.
6. Waiting for April. Update your W-4 if you want the benefit in each paycheck.

Sources

1. Working Families Tax Cuts: tax deductions for working Americans and seniors — Internal Revenue Service. Accessed October 9, 2026.
2. Tax Tip 2026-06: How to take advantage of no tax on tips and overtime — Internal Revenue Service. Accessed October 9, 2026.
3. Notice 2025-69: guidance for individuals who received tips or overtime in 2025 — Internal Revenue Service. Accessed October 9, 2026.
4. Schedule 1-A (Form 1040), Additional Deductions (2025) — Internal Revenue Service. Accessed October 9, 2026.
5. Schedule 1-A (Form 1040) 2026 — draft — Internal Revenue Service. Accessed October 9, 2026. Draft; line numbers may change
6. FS-2026-04: Schedule 1-A, Additional Deductions — what to know about the new form — Internal Revenue Service. Accessed October 9, 2026.
7. Occupations that customarily and regularly received tips (Treasury Tipped Occupation Codes) — Internal Revenue Service. Accessed October 9, 2026.
8. IR-2026-49: Final regulations listing tipped occupations — Internal Revenue Service. Accessed October 9, 2026.
9. What to know about the No Tax on Overtime deduction — Internal Revenue Service. Accessed October 9, 2026.
10. FS-2026-13: Updates to questions and answers about the new deduction for qualified overtime compensation — Internal Revenue Service. Accessed October 9, 2026. August 2026; supersedes FS-2026-01
11. 2026 General Instructions for Forms W-2 and W-3 — Internal Revenue Service. Accessed October 9, 2026.
12. Form W-4 (2026), Employee's Withholding Certificate — Internal Revenue Service. Accessed October 9, 2026.
13. Publication 15-T (2026), Federal Income Tax Withholding Methods — Internal Revenue Service. Accessed October 9, 2026.
14. Nineteen states have conformed to the OBBBA's no tax on tips deduction (May 28, 2026) — Ballotpedia News. Accessed October 9, 2026.