No tax on overtime and tips: what you can deduct

Both deductions are claimed on the new Schedule 1-A and reduce taxable income on Form 1040 line 13b. You get them whether you itemize or take the standard deduction.

Qualified overtime is the overtime pay the Fair Labor Standards Act requires, above your regular rate. For most hourly workers that is the half in time-and-a-half: hours over 40 in a workweek, times one-half, times your regular rate.

Example: you earn $20 an hour and work 50 hours. You are paid $30 for each of the 10 overtime hours, $300 in all, but only $100 of it, the $10 premium per hour, is qualified overtime.

If your employer pays more than the Act requires, such as double time, only the part the Act requires counts. Overtime paid only because of a state law or a union contract does not count. Neither does overtime of someone the Act does not cover, such as most salaried exempt employees, or of an owner with at least 20% of the business who manages it.

Qualified tips are voluntary cash or charged tips from customers, including tips shared with you, in an occupation on the IRS list of occupations that customarily received tips by December 31, 2024. The list has about 70 occupations in eight groups, from food and beverage service to rideshare and delivery drivers.

Tips must be reported on a Form W-2, a Form 1099 or another statement, or by you on Form 4137. If you are self-employed, the deduction cannot be more than the net income of the business the tips came from. People in a specified service trade or business, such as health, law or consulting, and employees of one, do not qualify.

For 2025, employers did not have to show qualified overtime separately; some put it in box 14 and the IRS lets you work it out from pay stubs or your employer’s records.

From 2026, employers must report it in box 12 with code TT. The code shows all your qualified overtime, even above the $12,500 limit. Rare contractors who get it on a 1099 see it in box 1d of Form 1099-NEC or box 14 of Form 1099-MISC.

Your employer still withholds tax on overtime. If you expect a large deduction, you can give your employer a new Form W-4 and enter it in step 4(b), so less tax comes out during the year.

Social Security and Medicare tax still apply to overtime and tips, and so does self-employment tax for the self-employed.

States decide for themselves. Illinois starts from federal adjusted gross income, and these deductions come after it, so they do not lower Illinois tax. California did not adopt them. A few states passed their own versions.