No Tax on Tips and Overtime Calculator
The One Big Beautiful Bill Act created deductions of up to $25,000 for tips and $12,500 for overtime premium pay. They are real, they are temporary, and — the part almost nobody explains — they are not built into your 2026 withholding unless you file a new W-4.
Tax year 2026 · Updated 2026-08-29 · Federal, state and local withholding · Free, no sign-up
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What the deductions actually are
Three separate deductions, all created for tax years 2025 through 2028, all available whether or not you itemise, and none of them exempt from Social Security and Medicare tax.
Qualified tips: up to $25,000 per return. Your occupation must be on the Treasury list of jobs that customarily and regularly received tips as of the end of 2024. Married taxpayers must file jointly to claim it.
Qualified overtime: up to $12,500, or $25,000 filing jointly. Only the premium portion counts — the half above your regular rate that the FLSA requires, not the whole overtime payment.
Senior deduction: $6,000 for each taxpayer aged 65 or over, stacking on top of the existing additional standard deduction for age.
All three phase out above modified AGI of $150,000 single or $300,000 joint, at $100 of deduction lost for every $1,000 of income above the threshold. The senior deduction phases out earlier, from $75,000 single, at 6% of the excess.
Why your paycheck did not change
This is the part that catches people out. The 2026 percentage-method withholding tables reflect the permanent rates and the higher standard deduction — but they do not build in the tips, overtime, senior or car-loan deductions. If you change nothing, you get the benefit as a larger refund in 2027 rather than as a bigger paycheck now.
The mechanism the IRS provided is the redesigned Deductions Worksheet on the 2026 Form W-4. Line 1a is qualified tips, line 1b qualified overtime, line 1c qualified vehicle loan interest, lines 3a and 3b the $6,000 senior amounts. The worksheet total goes to Step 4(b), which the percentage method subtracts from your annualized wages before the tables are applied. Our W-4 walkthrough shows exactly where.
Tips and overtime remain fully subject to Social Security and Medicare. A $10,000 tip deduction saves you income tax at your marginal rate — $2,200 at 22% — not the full $10,000, and not a cent of the 7.65% FICA.
Working out your qualified overtime premium
Take your overtime hours for the year and multiply by half your regular hourly rate. At $28 an hour, 200 overtime hours at time and a half produce $8,400 of overtime pay but only $2,800 of qualified premium. Double-time hours count the full extra hour, so 20 double-time hours at $28 add $560.
Employers are expected to report qualified overtime separately for 2026 after a one-year reporting reprieve for 2025, so the figure should eventually appear on your W-2 rather than needing to be reconstructed. The overtime calculator isolates the premium for a single week.
State treatment varies
These are federal deductions. Most states that tax income do not follow them, so your state tax is unchanged. Two exceptions matter: Georgia excludes up to $1,750 each of overtime and cash tips from state taxable income for 2026 through 2028, and Michigan created its own tip and overtime deductions on the same timetable. Alabama's overtime exemption, by contrast, expired in mid-2025 and was not renewed.
Frequently asked questions
Is there really no tax on tips in 2026?
Not quite. There is a deduction of up to $25,000 of qualified tips from federal taxable income, which removes the income tax on that amount but not the 7.65% Social Security and Medicare. It also phases out above $150,000 of modified AGI and expires after 2028.
Does the overtime deduction apply to my whole overtime check?
No. Only the premium — the extra half in time-and-a-half. On $30 an hour, an overtime hour pays $45 and $15 of it is the qualified premium.
Will my paycheck go up automatically?
No. The 2026 withholding tables do not include these deductions. To feel the benefit each payday you must file a new Form W-4 with the amount on Step 4(b). Otherwise it arrives as a refund.
How much is the tips deduction worth?
Your marginal federal rate multiplied by the deductible amount. A $20,000 tip deduction in the 12% bracket is worth $2,400; in the 22% bracket, $4,400.
Do these deductions reduce Social Security and Medicare tax?
No. Tips and overtime remain fully subject to FICA. Only federal income tax is affected.