No Tax on Tips and Overtime: Who Qualifies and How to Claim It

"No tax on tips" and "no tax on overtime" were two of the most talked-about pieces of the 2025 tax law known as the One Big Beautiful Bill Act. They are real, but they work as deductions with limits, not a blanket exemption. Here is what you need to know before you file.

The short version

No tax on tips: who qualifies

The deduction covers voluntary cash or card tips from customers, including amounts received through tip-sharing, for workers in occupations that customarily received tips before 2025. Treasury published a list of qualifying occupations, which includes jobs such as servers, bartenders, hair stylists, personal trainers, delivery and rideshare drivers, and many others.

What does not count:

• Mandatory service charges or automatic gratuities added to a bill
• Tips in jobs not on the qualifying list
• Tips you didn't report as income

Self-employed workers can qualify too, but the deduction can't exceed the net income from the business where the tips were earned.

No tax on overtime: who qualifies

Only the premium portion of overtime counts, meaning the extra "half" in time-and-a-half that the Fair Labor Standards Act (FLSA) requires for hours over 40 per week.

Example: you earn $24 an hour and work 10 overtime hours at $36. You are paid $360 for those hours, but only the premium, $12 × 10 = $120, is qualified overtime. The other $240 is regular pay.

Overtime paid only because of a union contract or a state law (and not required by the FLSA) generally does not qualify, and workers exempt from FLSA overtime rules, such as many salaried professionals, don't benefit.

Income limits

Both deductions shrink by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 for married couples filing jointly). Higher earners get a smaller deduction or none at all.

What is still taxed

• Social Security and Medicare (FICA) taxes still apply to tips and overtime.
• State income tax may still apply. Some states follow the federal deduction and others don't.
• The deduction lowers taxable income; it doesn't remove the income from your return.

How to claim it

1. Get the right paperwork. Employers report qualified tips and qualified overtime on your W-2 (or you may receive a separate statement). Self-employed workers use 1099 forms and their own records.
2. Have a valid Social Security number, and if married, file a joint return. Both are required to claim the deductions.
3. Claim the deduction on your federal return. It is reported on a new schedule (Schedule 1-A) and taken in addition to the standard deduction. Tax software will ask about tips and overtime.
4. Keep records. Pay stubs, tip logs and employer statements help if your amounts are questioned.

How much could you save?

A deduction saves your tax rate times the amount deducted. A server in the 12% bracket who deducts $10,000 of qualified tips saves about $1,200 in federal income tax. Someone in the 22% bracket deducting $5,000 of qualified overtime saves about $1,100. Compare this with the new 2027 brackets in our 2027 tax brackets guide.

Smart moves

• Report all tips. Unreported tips can't be deducted, and they lower your future Social Security benefits.
• Revisit your W-4 if you expect a large deduction, so less tax is withheld during the year.
• Use the savings intentionally, such as building an emergency fund if your income varies.

Source: IRS guidance on the One Big Beautiful Bill Act tips and overtime provisions. Rules can be clarified by later IRS guidance; check IRS.gov when you file.