No Tax on Tips & Overtime: How Much Will You Save?
Calculate your real take-home pay with the new OBBBA deductions for tips (up to $25,000) and overtime (up to $12,500). See your 2026 tax savings instantly.
How the No Tax on Tips and Overtime Deductions Work in 2026
The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, created two new above-the-line deductions that reduce taxable income for millions of American workers. The tips deduction allows workers in traditionally tipped industries to deduct up to $25,000 in tip income per year. The overtime deduction allows workers to deduct up to $12,500 in overtime premium pay ($25,000 for married filing jointly).
These are deductions, not credits — they reduce your taxable income rather than directly reducing your tax bill. The actual savings depend on your marginal tax bracket. A worker in the 22% bracket who deducts $15,000 in tips saves $3,300 in federal tax. A worker in the 12% bracket saves $1,800 on the same deduction.
Both deductions phase out for individuals with adjusted gross income above $150,000 ($300,000 for married filing jointly). They are temporary provisions effective for tax years 2025 through 2028.
Who Qualifies for the Tips Deduction?
The tips deduction applies to workers in traditionally and customarily tipped occupations. This includes restaurant servers, bartenders, hairdressers, valets, hotel staff, delivery drivers, and similar positions. The IRS has issued guidance clarifying that tips must be reported to your employer and on your tax return — the deduction does not eliminate the reporting requirement, only the tax liability on that income.
Important limitations: tips and overtime pay cannot be "double counted." If overtime hours also generate tips, you must allocate the income to one deduction or the other. Independent contractors who receive tips through gig apps may also qualify, but the rules are more complex — consult a tax professional for 1099 situations.
Who Qualifies for the Overtime Deduction?
The overtime deduction applies to the premium portion of overtime pay — the extra half in "time and a half." If your regular rate is $20/hour and you earn $30/hour for overtime, only the $10 premium per overtime hour qualifies for the deduction, not the base $20. The deduction is capped at $12,500 for single filers and $25,000 for joint filers.
Only overtime required under the Fair Labor Standards Act (FLSA) qualifies — hours worked beyond 40 in a workweek. State-specific daily overtime rules or contractual overtime pay arrangements generally do not qualify. Your employer must report qualifying overtime compensation on your W-2 for you to claim the deduction.
Real-World Examples
Restaurant server earning $28,000 in wages + $18,000 in tips = $46,000 total. Standard deduction: $16,100. Tips deduction: $18,000. Old taxable income: $29,900. New taxable income: $11,900. Federal tax savings: approximately $1,990 per year ($166/month extra take-home).
Manufacturing worker earning $52,000 base + $10,000 overtime premium = $62,000 total. Overtime deduction: $10,000. Federal tax savings: approximately $2,200 per year at the 22% bracket. Combined with a working spouse who earns tips, a family could save $4,000-5,000 annually.
State Tax Implications
The OBBBA deductions are federal only. As of 2026, more than 20 states have introduced legislation addressing state-level treatment of tips and overtime. Some states that automatically conform to federal tax law have adopted the deductions. Others have decoupled and still tax tips and overtime at the state level. Check your state's current rules — the savings calculated here are federal only.
The IRS confirmed that the No Tax on Tips deduction is claimed on the new Schedule 1-A, not the standard Schedule A. This means it reduces your adjusted gross income (above-the-line deduction), benefiting you even if you take the standard deduction rather than itemizing.
