Changes to Taxes on Tips & Overtime: Your 101 Guide

If you work in the service industry or regularly collect overtime pay, your taxes are going to look different this year. Thanks to the One Big Beautiful Bill, tips and overtime pay may be tax-deductible. 

But what does that actually look like, and more importantly, how might this save you money? Read on to learn more about the deduction and what it looks like in real life.

Key Takeaways

Qualifying employees can deduct tips or overtime in 2025. 

The IRS is still working out this deduction. 2025 is a transition year.

Try to keep personal records of tips or overtime from shifts.

3 must-know facts about tips and overtime

No Tax on Tips

As per the IRS’s recently issued guidelines, if you work in an industry where tipping is the norm (think server, barista, or stylist), you can deduct up to $25,000 of your tips from your federal income. This deduction also applies to you if you’re self-employed and receive tips on a fairly regular basis, like a housekeeper or tour guide. 

No Tax on Overtime

If you get overtime pay when you work more than 40 hours a week under the Fair Labor Standards Act (FLSA), you can deduct up to $12,500 of that pay if you’re single ($25,000 if you’re filing jointly). 

This deduction only applies to qualified overtime compensation, such as the “half” of “time-and-a-half” pay as required by FLSA, so if your employer pays more than needed, or your state law requires additional overtime pay, it won’t count towards the deduction.

It does not apply to workers, such as many agricultural workers, who do not receive overtime under the FLSA but receive it under state laws or other statutes. 

2025 is a transition year

The IRS is still rolling out guidelines on reporting, and the paper trail won’t always line up perfectly. 

To avoid confusion, start logging cash tips or overtime hours for your own record. It might make things easier when tax season rolls around. Your final paystub of the year may help you to sort things out as well.

By the time you file your 2026 returns, with newly designed W-2s and 1099s, reporting tips and overtime deductions should be more seamless. However, you may still want to keep your own tip and overtime logs to help ensure that you get every dollar of deduction that you’re entitled to.

The fine print: Considerations for deductions on tips and overtime

Here are a few things to keep in mind when it comes to these deductions:

This only applies to federal income tax. No tax on overtime or tips applies to federal income tax only. Your pay is still subject to Social Security, Medicare, or state/local income taxes on tips and overtime. 

The deduction has a phase out threshold. If your modified adjusted gross income (MAGI) is over $150,000 (or $300,000 if filed jointly), you won’t qualify for this deduction. 

This is a limited-time deduction. This deduction only applies for tax years 2025 to 2028.

You must have a Social Security Number. You can’t claim the deduction unless you have a valid Social Security Number on your tax return.

If you’re married, you must file jointly. Both deductions are limited to $12,500 per individual on the return, so $25,000 in total for joint filers. They may be phased out at modified adjusted gross incomes greater than $150,000 ($300,000 if married filing jointly).  

Remind me…what is a deduction?

A deduction means your income gets to pull a disappearing act. It’s the amount of money the IRS lets you subtract from your income when it calculates how much tax you owe. It means you’ll pay less tax overall.

For example, if you made $70,000 in 2025 but earned a $10,000 deduction, the IRS will tax you as if you made $60,000: 

$70,000 (income) – $10,000 (deduction) = $60,000 taxable income. 

A deduction is not a refund. A $10,000 deduction doesn’t mean you get $10,000 back; it just means you reduce the amount of income tax you owe on your return. 

No tax on tips, IRL

Not all tips are eligible for the deduction. Here are some additional points to consider.

Tip income must be discretionary, meaning the customer has to choose to tip. For example, if your restaurant has a mandatory 15% gratuity added to all checks, those tips can’t be deducted. If your tips are a mix of discretionary and mandatory, you will want to keep detailed records to separate the two.

You can’t be self-employed in a Specified Service Trade or Business (SSTB) under section 199A. The deduction may not exceed the self-employed individual’s net income from the trade or business where the tip income was earned. Your employees are also ineligible. 

Let’s explore what No Tax on Tips looks like across industries. 

Server with reported tips

Let’s say you’re a server with a high volume of reported tips on credit card transactions.

To find your total qualified tips to deduct, you can use the following: 

Total sum from the “Social Security tips” reported in Box 7 on your W-2 OR

Tips reported on Form 4070 

The choice is yours, but it’ll probably depend on how confident you are in your employer’s record-keeping. 

For example, if you’re a server and your W-2, Box 7, shows $10,000 reported in “Social Security tips” (Box 7 of your W-2) and you have no additional tips to report, you’d deduct $10,000 from your taxable income.

Hair stylist, with cash tips

If you work in a business that largely receives cash tips, like a hair stylist or bartender, you might have to rely on your own tip logs to find your deduction unless you regularly report them to your employer. That’s because those cash tips don’t typically get broken out into your W-2. 

To qualify for the tip deduction, consider recording unreported cash tips in your log through Form 4137. You can add those unreported tips to your reported tips from Form 4070 or in Box 7 of your W-2. 

So, if you’re a bartender with $10,000 in tips reported on Form 4070, and you report an additional $5,000 in cash tips through Form 4137, you may be able to deduct $15,000 from your taxable income.  

Self-employed housekeeper using payment apps

If you’re self-employed, like a house cleaner or contractor, but get tip income from your work, you’ll need to prove, through records and logs, what portion of your income is pay and what is a tip. 

When people pay you by credit card or through a payment app, you might need to break down each payment in your records, separating the tip from the total to find your deduction. 

Say you’re a housekeeper and you receive a Form 1099-K from a third-party software showing $70,000 of payments. If your records indicate that across those transactions, $5,000 of the total was tips from clients, you can deduct that from your taxable income.

No tax on overtime, IRL

The No Tax on Overtime deduction may help a variety of overtime workers, but it’s important to remember that only qualified overtime is eligible for the deduction.

Qualified overtime compensation is defined as overtime paid to an individual whose occupation is covered by the Fair Labor Standards Act of 1938 (FLSA). Only the overtime amount which exceeds the regular rate of pay is eligible for the deduction. You may need to do a little digging on your year-end paystub or with the help of your payroll department to determine the amounts eligible. 

Let’s see how qualified overtime compensation impacts taxes across different real world examples. 

Warehouse worker, FLSA overtime

If you work overtime, but your employer follows federal law, finding your deductible is simple. Overtime premiums should be reported on each of your payroll statements. Simply add up the overtime pay over 2025 to determine your overtime deduction. 

So, if you made $80,000 in 2025, and your overtime pay was $8,000, you can deduct that $8,000 from your taxable income.

Electrician, paid above FLSA minimum

If you work in a role that pays more than FLSA standard overtime pay, you’re receiving blended overtime pay. For example, you might work in a union where overtime is paid at a rate above the regular rate. 

To figure out your deduction, you could: 

Determine total overtime pay from your pay stubs

Subtract extra pay beyond FLSA minimums (which could be bonuses, state overtime pay, or union premiums)

The difference, or what remains, is the standard FLSA overtime pay, which is eligible for the deduction

For example, if you made $15,000 in overtime pay in 2025, but $10,000 of that pay was beyond FLSA minimums, you could deduct that remaining $5,000 from your taxable income. 

Tip and overtime deductions could benefit you

No Tax on Tips and No Tax on Overtime are just two of the changing tax policies to come out of the One Big Beautiful Bill. Because W-2s were not changed in 2025 to reflect those new policies, you might have to do more legwork to take the deduction. There are more changes to come this tax season, and we’re here to help you navigate all of them. TurboTax and TurboTax Live experts can help you understand the new deductions and how they might apply to you.