No tax on tips & overtime — what you'll actually save (2026)
The new deductions are real, but smaller than the headlines. This tells you your true federal income-tax saving — with the two facts almost nobody explains: only the overtime half-time premium counts, and FICA (7.65%) still comes out of every tip and overtime dollar.
Estimate your saving
How it breaks down
Email me this estimate + how to claim it on Schedule 1-A
Worked examples
Married couple, hotel + warehouse, tips and some overtime
Estimated federal income-tax saving: $1,801
That's $15,005 deducted from your taxable income at your ~12% federal rate.
ℹ️ Social Security + Medicare (FICA, 7.65%) is still taken from these same dollars — about $1,148. These deductions cut income tax only.
How it breaks down
- Qualifying tips deducted: $12,600
- Your overtime pay: ≈ $7,215
- Deductible half-time premium only: $2,405
- Total income deducted: $15,005
- Your federal income-tax saving: $1,801
Top-restaurant server, high income, both caps phased down
Estimated federal income-tax saving: $7,608
That's $31,700 deducted from your taxable income at your ~24% federal rate.
⚠ Your income is above $150,000, so both caps are phased down ($100 less per $1,000 over).
ℹ️ Social Security + Medicare (FICA, 7.65%) is still taken from these same dollars — about $3,046. These deductions cut income tax only.
How it breaks down
- Qualifying tips deducted: $22,100 (capped)
- Your overtime pay: ≈ $39,060
- Deductible half-time premium only: $9,600 (capped)
- Total income deducted: $31,700
- Your federal income-tax saving: $7,608
ITIN filer, bar work plus overtime — saving is zero
Estimated federal income-tax saving: $0
⚠ With an ITIN you don't qualify for either deduction — both require a Social Security number. Your saving is $0.
ℹ️ Social Security + Medicare (FICA, 7.65%) is still taken from these same dollars — about $1,448. These deductions cut income tax only.
How it breaks down
- Qualifying tips deducted: $0 (capped)
- Your overtime pay: ≈ $8,190
- Deductible half-time premium only: $0 (capped)
- Total income deducted: $0
- Your federal income-tax saving: $0
Examples are recomputed whenever the underlying rates or data change; the date above is the last recompute.
Methodology & data sources
The One Big Beautiful Bill Act created two temporary federal deductions for tax years 2025–2028. Tips: deduct up to $25,000 of qualifying tips per return (married couples must file jointly), phasing out by $100 for every $1,000 of income above $150,000 single / $300,000 joint. Overtime: deduct only the FLSA "half-time" premium — the extra 0.5× above your regular rate paid over 40 hours a week, not your full time-and-a-half wage — up to $12,500 single / $25,000 joint, with the same phase-out. Both are above-the-line (you don't have to itemize), both require a Social Security number so ITIN filers don't qualify, and both are claimed on the new Schedule 1-A. We estimate your saving the honest way: we apply the 2026 IRS brackets to your income minus the standard deduction, then again after subtracting your qualifying tips and overtime premium — the difference is your real income-tax saving. Crucially, these are income-tax deductions only: Social Security and Medicare (FICA, 7.65%) are still withheld from every tip and overtime dollar, and the wages still appear on your W-2. State income tax may still apply. Our Freshness Keeper checks these caps and thresholds against the IRS each year.
Sources: IRS — OBBB tips & overtime deductions · P.L. 119-21 §70201–70202 · DOL — FLSA overtime
Frequently asked questions
Is overtime really tax free now?
No. It's an income-tax deduction, and only the half-time premium counts — if you make $30/hr and OT pays $45/hr, only the $15/hr premium is deductible. FICA (7.65%) still comes out.
Is there really no tax on tips?
You can deduct up to $25,000 of qualifying tips from federal income tax, but they stay on your W-2 and FICA is still withheld. It phases out above $150k ($300k joint) and needs an SSN.
Can I claim both?
Yes — separate caps, and you can take both without itemizing, on the new Schedule 1-A.
Do ITIN filers qualify?
No. Both deductions require a Social Security number.
How long do these last?
Tax years 2025 through 2028, unless Congress extends them.