What changed
The One Big Beautiful Bill Act, signed July 4, 2025, created four temporary federal deductions for tax years 2025 through 2028. Two get the most attention: a deduction for qualified tips and a deduction for qualified overtime compensation. Neither makes tips or overtime completely tax-free. Here's exactly what they do and how to see the benefit in your paycheck in 2026.
Short version: Tipped workers can deduct up to $25,000 of tips. Overtime workers can deduct the extra half of time-and-a-half, up to $12,500 ($25,000 joint). Both lower federal income tax only. You claim them on your tax return, or on a 2026 W-4 to get the savings in each paycheck.
No tax on tips: the rules
- Cap: $25,000 per tax return.
- Who qualifies: workers in occupations that customarily and regularly received tips before 2025, as listed by the Treasury. That includes servers, bartenders, baristas, hairstylists, nail techs, rideshare and delivery drivers, hotel staff and casino dealers.
- What counts: voluntary cash or card tips, including tip-pooling, that are reported to your employer or on your return. Mandatory service charges are wages, not tips.
- Income phase-out: the deduction falls by $100 for each $1,000 of modified AGI above $150,000 ($300,000 joint).
- Not eligible: married filing separately, filers without a valid SSN, and tips in specified service businesses.
No tax on overtime: the rules
- Cap: $12,500 per return, or $25,000 for married filing jointly.
- What counts: only the premium portion of overtime required by the Fair Labor Standards Act, meaning the "half" in time-and-a-half for hours over 40 in a workweek.
- What doesn't count: your regular rate for overtime hours, overtime required only by state law (like California's daily overtime), union contracts or company policy, and the extra half in double time.
- Income phase-out: $100 per $1,000 of modified AGI above $150,000 ($300,000 joint).
- Reporting: from 2026, employers report qualified overtime in W-2 box 12, code TT.
Real examples (2026)
A server earning tips
A single server in Texas earns $12/hour for 32 hours a week plus about $800 in reported tips every two weeks ($20,800 a year). Claiming the tips deduction on her W-4 cuts federal withholding by about $2,325 a year, or $89.44 per paycheck. Her take-home rises to $1,433.17 every two weeks. She still pays 7.65% FICA on her tips.
A nurse working overtime
A single nurse earns $38/hour for 36 regular hours, plus 8 hours of FLSA overtime a week. Only the $19 premium on each overtime hour qualifies: $7,904 a year. That saves about $1,739 in federal tax ($66.88 per bi-weekly check) at her 22% bracket.
Try your own numbers in the no tax on tips calculator or the no tax on overtime calculator.
How to get the savings in your paycheck
By default, your employer keeps withholding as if the deductions didn't exist, and you'd get the savings as a bigger refund. To get the money in each paycheck instead:
- Estimate your qualified tips and overtime premium for the year. Be conservative.
- Complete the Step 4(b) deductions worksheet on a 2026 Form W-4. It has dedicated lines for tips, overtime, car loan interest and the senior deduction.
- Give the new W-4 to your employer. Withholding usually changes within one or two pay periods.
If your tips or overtime fall short of your estimate, you could under-withhold and owe at tax time. Revisit your W-4 if your hours change significantly.
What about state taxes?
States decide independently. Some states that start their tax calculation from federal taxable income may follow the new deductions automatically, and some have passed their own versions (Georgia exempts up to $1,750 of tips and $1,750 of overtime for 2026). Many others decouple, so tips and overtime stay fully taxable at the state level. Our calculators assume no state benefit unless a state has clearly adopted one.
The other two new deductions
- Senior deduction: $6,000 per person age 65 or older ($12,000 if both spouses qualify), phasing out at 6% of modified AGI above $75,000 ($150,000 joint). It's on top of the regular additional standard deduction for seniors.
- Car loan interest: up to $10,000 of interest on a loan for a new, U.S.-assembled personal vehicle bought after 2024, phasing out above $100,000 of modified AGI ($200,000 joint).
Both can also go on Step 4(b) of the 2026 W-4. The paycheck calculator includes all four deductions in section 5.