No Tax on Tips and Overtime: Caps, Phase-Outs, and How to Claim

Two deductions from the 2025 tax law can lower the income tax you owe if you earn tips or overtime pay. People often call them "no tax on tips" and "no tax on overtime." They are deductions, not credits. They apply for tax years 2025 through 2028. The law is P.L. 119-21, which the IRS calls the One, Big, Beautiful Bill. IRS: Working Families Tax Cuts, individuals and workers

This post explains who can claim each deduction, the caps, the income limits, how employers report the amounts, and how to claim them. Examples use tax years 2025 and 2026.

What a deduction does here

A deduction lowers the income that income tax is figured on. It does not lower Social Security or Medicare tax. Tips and overtime pay are still subject to those payroll taxes. The amounts are claimed after adjusted gross income, on Form 1040, line 13b. IRS: Schedule 1-A, what to know

No tax on tips

You may deduct qualified tips if you are an employee or self-employed and you received them in an occupation on the IRS list of tipped jobs. The IRS list has more than 70 occupations in eight groups, from bartenders and wait staff to musicians, hair stylists, and gas pump attendants. Check the full list at IRS.gov/TippedOccupations.

Key rules:

• Qualified tips are voluntary cash or charged tips from customers, including tips shared through a tip pool.
• Service charges are not qualified tips unless the customer can turn them down or change them. A mandatory charge added to a large party's bill is one example that does not count. IRS: final regulations, IR-2026-49
• Cap: $25,000 per return.
• Self-employed workers cannot deduct more than their net profit from the business where the tips were earned.
• Excluded: people who work in a specified service trade or business under Section 199A, whether self-employed or employed by one.

No tax on overtime

This deduction covers only the extra pay that federal law requires. Under the Fair Labor Standards Act, overtime is paid at time and a half. Only the "half" part, the pay above your regular rate, counts. If your regular rate is $20 an hour and your overtime rate is $30, the $10 extra per hour is the amount that can count. IRS: What to know about the No Tax on Overtime deduction

• Cap: $12,500 per return, or $25,000 on a joint return.
• Who qualifies: anyone with overtime pay reported on a W-2, 1099, or another statement, and a valid Social Security number.

Income phase-outs

Both deductions shrink when your modified adjusted gross income (MAGI) is above $150,000. For joint filers, the threshold is $300,000. Schedule 1-A works it out this way: take the amount above the threshold, divide by $1,000 and round down, then multiply by $100. Subtract that from the cap. IRS: 2025 Schedule 1-A

Example for learning only, not a calculation for your return: a single filer has MAGI of $160,000. That is $10,000 above the threshold. Ten times $100 is a $1,000 reduction. A $25,000 tip cap becomes $24,000. A $12,500 overtime cap becomes $11,500.

Reporting changes

For tax year 2025, employers did not have to show overtime separately on Forms W-2 or 1099. The IRS gave penalty relief for 2025 tip and overtime reporting. If you did not get a statement with the overtime amount, use the methods in the IRS notice and the Schedule 1-A instructions. IRS: penalty relief for tax year 2025

For 2026 and later, employers report more on the forms:

• Form W-2, box 12, code TP: total cash tips reported to the employer.
• Form W-2, box 14b: the tipped occupation code, up to two. Code 000 means the cash tips are not qualified tips.
• Form W-2, box 12, code TT: total qualified overtime pay. Only the "half" portion of time-and-a-half is reported here.

Self-employed workers and gig workers may see tips on Form 1099-NEC, box 1, Form 1099-MISC, box 3, or Form 1099-K, box 1a. If a tip was not reported to you, you can report it yourself on Form 4137. IRS: General Instructions for Forms W-2 and W-3 (2026)

How to claim the deductions

1. Fill out Schedule 1-A (Form 1040). Part I finds your MAGI. Part II is for tips. Part III is for overtime.
2. Attach Schedule 1-A to your Form 1040. The total goes on Form 1040, line 13b.
3. Include a valid Social Security number for each person who earned tips or overtime.
4. If you are married, file jointly to claim either deduction.
5. You can claim these deductions whether you take the standard deduction or itemize.

Keep your W-2s, 1099s, pay stubs, and any tip records. The IRS has said that a daily tip log can support the amount of tips you report, as long as it shows the date, the customer, and the tip amount. IRS: guidance for individuals who received tips or overtime, IR-2025-114

Checklist

• Confirm the tax year. The deductions apply for 2025 through 2028.
• Check whether your job is on the IRS tipped occupation list.
• Check your W-2 for box 12 codes TP and TT, and box 14b.
• Estimate your MAGI and find the threshold for your filing status.
• Confirm that you and your spouse have valid Social Security numbers.

General information, not advice for your return.

Sources: IRS Working Families Tax Cuts, individuals and workers (https://www.irs.gov/newsroom/working-families-tax-cuts-individuals-and-workers); IRS Schedule 1-A, what to know (https://www.irs.gov/newsroom/schedule-1-a-additional-deductions-what-to-know-about-the-new-form); IRS 2025 Schedule 1-A (https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf); IRS tipped occupations (https://www.irs.gov/TippedOccupations); IRS final regulations IR-2026-49 (https://www.irs.gov/newsroom/treasury-irs-issue-final-regulations-listing-occupations-where-workers-customarily-and-regularly-receive-tips-under-the-one-big-beautiful-bill); IRS No Tax on Overtime (https://www.irs.gov/newsroom/what-to-know-about-the-no-tax-on-overtime-deduction); IRS penalty relief for 2025 (https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill); IRS 2026 General Instructions for Forms W-2 and W-3 (https://www.irs.gov/instructions/iw2w3); IRS IR-2025-114 (https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025) This is general information, not advice about your specific return.

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