The short answer
For tax years 2025 through 2028, workers can deduct qualified tips and qualified overtime pay from the income subject to federal income tax. The tips deduction is up to $25,000 a year, and the overtime deduction up to $12,500, or $25,000 on a joint return. Both shrink by $100 for every $1,000 of modified adjusted gross income above $150,000, or $300,000 for a married couple filing jointly. Neither makes the pay tax-free: you still report all of it, Social Security and Medicare taxes still apply, and most states still tax it. Only voluntary tips in occupations on the Treasury's list count, not mandatory service charges, and only the premium part of overtime that federal law requires counts, such as the extra half in time and a half. You need a Social Security number valid for employment, married couples must file jointly, and you claim both on Schedule 1-A. Benefit programs such as SNAP still count your gross pay.
Are tips and overtime tax-free now?
No. Both changes are deductions, not exemptions. You report all your wages and tips as income, as before, then subtract the qualifying amount on Schedule 1-A when figuring taxable income. Your saving is the deduction multiplied by your tax rate, not the whole amount of the tips or overtime.
Both can be claimed whether you take the standard deduction or itemize. And because the standard deduction already removes much low-wage income from federal tax, the workers who earn least often gain least: a deduction is worth nothing to someone who owes no income tax. The deductions apply for tax years 2025 through 2028 unless Congress extends them.
The saving usually shows up when you file, as a larger refund or a smaller balance due, not in each paycheck. If you would rather see it during the year, you can give your employer a new Form W-4 that accounts for the deduction, though it is wise not to cut withholding so far that you owe in April.
Do my tips qualify?
Qualified tips are voluntary payments from customers in an occupation that customarily received tips before 2025, on a list the Treasury has published. It includes restaurant servers, bartenders, hairstylists, delivery drivers and many others. Cash tips, card tips and tips shared through a tip pool can all count if they are reported to your employer or on your return.
Mandatory service charges do not count, even when a restaurant passes them to staff, because the customer had no choice about paying them. An automatic 20 percent gratuity on a large party is a service charge, not a tip. If your restaurant adds such charges, ask how they appear on your pay stub, because they are wages for tax purposes but cannot be deducted as tips. Self-employed workers in a listed occupation can claim the deduction too, with exceptions for certain professional service businesses.
Does my overtime qualify?
Only overtime that the federal Fair Labor Standards Act requires counts, generally hours beyond 40 in a work week for employees who are not exempt from overtime rules, and only the premium part of it. If you are paid time and a half, the extra half is qualified overtime; the regular rate for those hours is not. A worker paid $6,000 in overtime at time and a half can deduct $2,000, the one-third that is premium, which in the 12 percent bracket saves about $240.
Overtime paid only because of a state law, a union contract or an employer's own policy does not count, such as daily overtime or double time on holidays, and neither does extra pay for salaried workers who are exempt from the federal rules. Salaried employees who are not exempt and are paid federal overtime can claim it like hourly workers.
How much can I deduct?
Swipe sideways to see the whole table.
| Deduction | Most you can deduct | Begins to shrink above |
|---|---|---|
| Qualified tips | $25,000 a year per return | $150,000 of income, or $300,000 for joint filers |
| Qualified overtime | $12,500, or $25,000 on a joint return | $150,000 of income, or $300,000 for joint filers |
Both are reduced by $100 for every $1,000 of modified adjusted gross income above the threshold. You need a Social Security number valid for employment, and a married person must file a joint return to claim either one.
What if we are married and both earn tips or overtime?
You must file jointly to claim either deduction. The tips limit is $25,000 per return, so a couple who both work in tipped jobs share one $25,000 cap rather than getting one each. The overtime limit doubles to $25,000 on a joint return. The income phase-out uses the couple's combined modified adjusted gross income, starting at $300,000. A couple in which one spouse earns tips and the other overtime can claim both deductions on the same return, each within its own limit.
What will it actually save me?
A hypothetical example: a restaurant server
Kayla is single and earns $28,000 in wages plus $12,000 in tips she reports to her employer. She deducts the $12,000 of qualified tips on Schedule 1-A. If her last dollars of income are taxed at 12 percent, the deduction saves her about $1,440 in federal income tax. She still pays Social Security and Medicare tax on all $40,000.
For Kayla, $1,440 is meaningful money. But for a worker with lower total pay who already owes little or no income tax, the deduction may be worth much less, and the Earned Income Tax Credit is often worth far more, because it is refundable and paid even when no tax is owed. It is based on total earnings, tips and overtime included. Parents should also check the Child Tax Credit.
What is still taxed?
Tips and overtime remain subject to Social Security and Medicare taxes, which also means they still count toward your Social Security record and raise your future benefit. They are subject to state income tax unless your state has adopted a similar deduction; some have and others have not, so check your state return's instructions.
For benefit programs, nothing changes. SNAP, Medicaid, housing assistance and most other programs look at gross pay, not taxable income, so tips and overtime count in full. Our SNAP guide explains how earnings are counted there.
How do I claim it?
From 2026, employers must report qualified overtime separately on Form W-2, along with qualified tips and the worker's occupation. For 2025 pay, employers could provide the figures another way, so check your final pay stub or ask. Keep your own daily record of tips received, which also protects you if your employer's figures are wrong. Tips you did not report to your employer can be reported on Form 4137, which also figures the Social Security and Medicare tax on them. Enter the amounts on Schedule 1-A, which also holds the new senior deduction and the car loan interest deduction.
If the figures on your W-2 look wrong, ask your employer for a corrected form before you file, and bring your own log. If an employer will not correct it, the IRS has a substitute form, Form 4852, for reporting wages from your own records; a free Volunteer Income Tax Assistance site can help you use it.
What if I drive for an app or earn a salary?
Delivery and ride-share drivers and other self-employed workers in a listed occupation can deduct qualified tips received through an app or in cash. The deduction cannot be more than the net income from that work after expenses, so a driver whose costs nearly match their earnings gets little from it.
Salaried employees who are exempt from federal overtime rules, such as many managers and professionals, have no qualified overtime even when they are paid extra for long weeks. If you think you are wrongly classified as exempt, or your employer is not paying overtime you are owed, see unpaid wages and overtime.
Not tax advice
Your saving depends on your whole return, including filing status, tax bracket and other deductions and credits. None of our calculators models these deductions; our benefit calculators count gross pay, which is also how most programs treat tips and overtime.
Official sources
Before tax season
Ask your employer how your tips and overtime will be reported, and keep your own log through the year. If your income is modest, estimate your EITC before you count on the deduction; for many workers the credit is the bigger number.
