No tax on tips and overtime: who qualifies, and how to actually claim it
Two of the most talked-about tax breaks in years are now live — and the IRS is already sending refunds. But the details decide whether you get to keep more of your money. Here's exactly who qualifies, what counts, and how to claim both deductions without slipping up.
The One Big Beautiful Bill Act created two brand-new deductions for working Americans: "No Tax on Tips" and "No Tax on Overtime." Both were signed into law on July 4, 2025, both are retroactive to the start of 2025, and the Treasury and IRS finalized the detailed rules in April 2026. The IRS has confirmed it is already issuing refunds to eligible workers.
Before anything else, clear up the biggest myth in the name itself:
They also aren't permanent: both run only through the 2028 tax year unless Congress extends them. With that framing in mind, let's break down each one. (*Overtime is up to $12,500, or $25,000 for married couples filing jointly.)
How much you can deduct
You can deduct up to $25,000 of qualified tips per year. That $25,000 cap is per tax return, and it's the same whether you're single or married filing jointly. The deduction is available whether you take the standard deduction or itemize.
It phases out at higher incomes: the deduction drops by $100 for every $1,000 your modified adjusted gross income exceeds $150,000 (single) or $300,000 (joint). For the self-employed, the deduction can't exceed your net income from the business where the tips were earned.
Who qualifies: the occupation must be on the IRS list
This is the make-or-break rule. You can only deduct tips if you work in an occupation that the IRS has formally listed as one that "customarily and regularly received tips" on or before December 31, 2024. The final regulations name more than 70 occupations, organized under the Treasury Tipped Occupation Code (TTOC) system into eight categories:
The category list above shows examples, not the full official list. If your exact role isn't obvious, the specific IRS occupation list is the authority — and it's the first thing we'd check for you.
What actually counts as a "qualified tip"
Even in a listed occupation, only qualified tips are deductible. A tip qualifies when it is:
- Paid voluntarily by the customer and not subject to negotiation — the customer must be able to reduce it (including down to zero, such as sliding a tip prompt to $0 on a card reader).
- In cash or a cash equivalent — cash, check, credit/debit card, gift card, or electronic/mobile payments denominated in cash (think card tips, or app payments).
- Received from customers, directly or through a mandatory or voluntary tip pool.
The fine print: excluded businesses, owners, and managers
Specified service trades or businesses (SSTBs). Tips earned in an SSTB — fields like health, law, athletics, performing arts, consulting and financial services (as defined for the Section 199A deduction) — generally don't qualify. Note: IRS Notice 2025-69 provides transition relief that effectively suspends enforcement of this SSTB disqualification for 2025 until SSTB-specific rules are finalized, so this is an area to watch.
Owners and the employer as payor. To stop wages being relabeled as "tips," the rules apply a facts-and-circumstances recharacterization test — with an irrebuttable presumption against you if the employer itself is the payor of the tip, or the recipient has a direct ownership interest in the business.
Managers and supervisors. Tips a manager receives through a tip pool are not qualified. But tips a manager or supervisor receives directly for services they personally performed in a tipped occupation can still qualify, if all other requirements are met.
Only the "extra" part of overtime counts
This is the detail almost everyone gets wrong. The deduction is not for your entire overtime paycheck. It's only for the premium portion — the extra amount above your regular rate that federal law (the Fair Labor Standards Act) requires. In plain terms: with time-and-a-half, only the "half" is deductible, not the whole overtime payment.
Careful with double-time: if your employer pays 2×, only the FLSA-required half still counts — which works out to one-quarter of the total, not one-half. So $10,000 of double-time overtime yields a $2,500 deductible premium. Anything an employer pays above what the FLSA requires (double-time, state-law or contract overtime beyond the federal rule) isn't deductible.
How much you can deduct
The overtime deduction is capped at $12,500 per year, or $25,000 for married couples filing jointly. Like the tips deduction, it's available whether or not you itemize, and it phases out over the same income thresholds — $150,000 (single) and $300,000 (joint), reduced $100 per $1,000 above the line.
The mechanics, step by step
- Use Schedule 1-A. Both deductions are claimed on the new IRS form Schedule 1-A (Additional Deductions), attached to your Form 1040, 1040-SR or 1040-NR.
- You don't have to itemize. Both are "above-the-line style" deductions you can take on top of the standard deduction.
- You need a valid Social Security number. A work-eligible SSN is required to claim either deduction — ITIN filers are not eligible.
- Married? File jointly. Married taxpayers must file a joint return to claim these deductions.
- The tips/overtime must be reported. For tips, that means a W-2, 1099-NEC, 1099-MISC, 1099-K, or your own Form 4137. Overtime must likewise be reported on a W-2 or 1099.
The 2025 vs 2026 reporting wrinkle
Because the law passed mid-2025, the IRS did not redesign the 2025 Form W-2 or the 2025 withholding tables. For the 2025 tax year, employers make a good-faith estimate of employees' cash tips (often noted in Box 14), and there's penalty relief for 2025 reporting under IRS Notice 2025-62. Practically, that means many workers had a full year of tax withheld on income that's now partly deductible — which is exactly why refunds are flowing.
Starting with 2026 wages, W-2s get dedicated fields: the Treasury Tipped Occupation Code in new Box 14b, and qualified tips in Box 12 with code "TP," with qualified overtime reported in Box 12 under code "TT."
The costly misunderstandings
- Thinking it wipes out all tax. It only reduces federal income tax. Social Security, Medicare, and state income tax can still apply.
- Counting your whole overtime check. Only the FLSA premium (the "half") is deductible — not the entire overtime amount.
- Treating auto-gratuities as tips. A mandatory service charge the customer can't modify is not a qualified tip.
- Assuming your job qualifies. If your occupation isn't on the IRS list, the tips deduction isn't available — check before you count on it.
- Overlooking the SSTB exclusion. Tips earned in certain professional-service fields may be excluded (with transition relief for 2025).
- ITIN filers claiming it. A work-eligible SSN is required.
- Very low earners expecting a windfall. If you already owe little or no federal income tax, a deduction may not change much — a large share of tipped workers already fall below the tax threshold.
What this means for you
For workers, the message is simple: if you earn tips or overtime, make sure your 2025 return actually captures these deductions — and if you already filed without them, look into amending. For employers in tipped and hourly industries (restaurants, salons, hospitality, delivery), the harder work starts with 2026 payroll: correctly identifying qualified tips and overtime, coding them, and getting the new W-2 boxes right. Mistakes there cost your team their deductions and can expose you to reporting penalties once the relief period ends.