These are deductions, not a full exemption
The "no tax on tips" and "no tax on overtime" rules are federal income-tax deductions, with caps, that you claim on your return. They don't make the money vanish from your paycheck, and they don't touch payroll tax.
FICA still applies. Social Security and Medicare (7.65%) come out of your tips and overtime exactly as before. Only federal income tax is reduced, and only up to the caps.
The caps
| Deduction | Cap | Phases out above |
|---|---|---|
| Tips | $25,000 | $150,000 single / $300,000 joint |
| Overtime | $12,500 single / $25,000 joint | $150,000 single / $300,000 joint |
Both require a Social Security number, and the overtime deduction phases out by $100 per $1,000 of income above the threshold.
Overtime: only the half-time premium counts
The big catch: only the FLSA "half-time" premium qualifies — the extra 0.5× your regular rate paid above 40 hours a week, not the full time-and-a-half. If you earn $30/hr and overtime pays $45/hr, only the $15/hr premium is deductible.
Tips: which ones qualify
Voluntary cash, charged or tip-shared amounts in an occupation that customarily received tips before 2025 (per the IRS list). Automatic gratuities don't qualify, and tips in a "specified service" field (law, health, consulting, finance, athletics) are excluded.
Calculate your real tip & overtime saving → Free tool: your actual federal saving after the caps — with FICA correctly still applied.