No tax on tips and overtime: how much can I deduct?
Direct answer: For 2025 through 2028 you can deduct up to $12,500 of qualified overtime ($25,000 joint) and up to $25,000 of qualified tips, itemizing or not. Only the FLSA-required “half” of time-and-a-half counts. Both shrink above $150,000 of income ($300,000 joint), and Social Security and Medicare taxes still apply.
By the numbers: About 6 million workers report tipped wages, the IRS estimates. Starting with 2026 pay, employers must show qualified overtime on the W-2 in box 12 with code TT, and tips with code TP plus an occupation code in box 14b. Source: IR-2025-114 (Nov. 21, 2025) and 2026 W-2 instructions
“for tax years after 2025, employees may not consider any amount of qualified overtime compensation in excess of what is reported on Form(s) W-2, box 12, code TT in determining their deduction.” — IRS FS-2026-13, Q20 (Aug. 2026)
Updated 2026-10-16
Quick Q&AIs overtime tax-free in 2026?
Not exactly. Overtime is still taxable pay with income tax withheld and Social Security and Medicare taxes taken out, but for 2025 through 2028 you can deduct the FLSA-required premium (the “half” of time-and-a-half) up to $12,500, or $25,000 on a joint return (IRS FS-2026-13).
How much of my overtime pay can I deduct?
Only the premium above your regular rate that the FLSA requires: overtime hours over 40 x one-half x your regular rate. The IRS example: 10 overtime hours at a $20 regular rate paid double time gives $100 of qualified overtime, not $400.
Do car salesmen get the no tax on overtime deduction?
Generally no. Dealership salespeople, partsmen and mechanics are exempt from FLSA overtime under 29 U.S.C. 213(b)(10)(A), and the Supreme Court held in 2018 that service advisors are too. Overtime the FLSA doesn't require isn't qualified, even if the dealer pays it.
What is box 12 code TT on my W-2?
Code TT is the total qualified overtime your employer paid you, required on W-2s starting with 2026. It can be more than you can deduct; Schedule 1-A applies the $12,500 or $25,000 cap and the income phase-out.
What if my W-2 doesn't show my overtime in box 12?
For 2026 and later, ask your employer for a corrected W-2 (Form W-2c). Only amounts reported with code TT count, and the IRS says a substitute Form 4852 can't be used (FS-2026-13, Q22-Q23).
Which jobs qualify for no tax on tips?
Jobs on the IRS list of occupations that customarily and regularly received tips by Dec. 31, 2024, such as bartenders, wait staff, barbers and delivery drivers. Tips must be voluntary. Self-employed people in a specified service business, and employees of one, don't qualify.
Can I claim no tax on tips or overtime if married filing separately?
No. If you're married you must file a joint return, and whoever received the tips or overtime needs a Social Security number valid for work.
Uses the IRS Schedule 1-A math. We never ask for your name, SSN or bank details, and neither should any honest calculator (IRS FS-2026-09).
Best move: check your pay stub and W-4 before the year ends
Before Dec. 31, check that payroll is tracking your overtime premium, then decide whether to update your W-4. Starting with 2026 pay, your deduction is limited to what your employer puts in box 12, code TT of your W-2, and withholding isn't cut for the deduction unless you file a new W-4.
The math:
Hourly at $25, 6 overtime hours a week for 40 weeks: 6 × 40 × ½ × $25 = $3,000 deductible (the other $6,000 of straight-time pay for those hours is not).
Single, $160,500 modified AGI, $12,500 of qualified overtime: $10,500 over the line = 10 full $1,000s × $100 = $1,000 off, so $11,500.
Server with $18,000 of tips in W-2 box 7 and $60,000 income: $18,000 deductible (IRS's own example).
IRS check: 50 hours at $20, paid double time, gives $100 of qualified overtime (FS-2026-13, Q16); this page's math gives the same.
2026 is the first year the W-2 must list it. Employers report qualified overtime in box 12 with code TT, and cash tips with code TP plus your Treasury Tipped Occupation Code in box 14b.
Only the W-2 amount counts. For 2026 and later, overtime your employer leaves off box 12 can't be deducted. If it's wrong or missing, ask for a Form W-2c; a substitute Form 4852 isn't accepted.
An overstated W-2 doesn't help. You can only use the qualified overtime you were actually paid.
Your paycheck won't change on its own. Employers keep withholding as usual unless you give them a new W-4 that counts the deduction (2026 W-4, Step 4(b)).
Double time, holiday pay or daily overtime beyond what the FLSA requires doesn't count; only the minimum premium for hours over 40 in a workweek does. A union contract or state law paying overtime doesn't make it qualified.
2025 returns were different: employers didn't have to list it, so workers could figure it from pay stubs (Notice 2025-69).
“for tax years after 2025, employees may not consider any amount of qualified overtime compensation in excess of what is reported on Form(s) W-2, box 12, code TT in determining their deduction.”
Salespeople, partsmen and mechanics who mainly sell or service cars, trucks or farm equipment at a dealer that sells to the public are exempt from FLSA overtime under 29 U.S.C. 213(b)(10)(A). In 2018 the Supreme Court held that service advisors are exempt too. Because the deduction only covers overtime the FLSA requires, those jobs generally get $0 from the overtime deduction, even if the store pays time-and-a-half by choice or through a pay plan.
The exemption is tied to those jobs. Other dealership employees, such as porters, detailers or office staff, aren't covered by it; if they're overtime-eligible under the FLSA, their required premium counts. Flat-rate techs and commission salespeople should look for code TT on their 2026 W-2 rather than assume.
Your occupation must be on the IRS list of jobs that customarily and regularly received tips on or before Dec. 31, 2024 (each has a Treasury Tipped Occupation Code, such as 101 bartenders and 102 wait staff).
Tips must be voluntary, paid in cash or by card, including tips shared through a tip pool.
Self-employed: the deduction can't exceed your net income from the business where you earned the tips. If you're self-employed in, or work for, a specified service trade or business (sec. 199A), you don't qualify.
Report every tip. On 2025 returns, tips in W-2 box 7 or reported on Form 4137 counted (IRS example: Ann, a server with $18,000 in box 7, uses $18,000).
Fine print: who is overtime-eligible, owners, federal employees, territories
Common FLSA overtime exemptions: executive, administrative and professional employees (including teachers), outside sales, some computer jobs, certain commissioned retail employees, railroad and airline workers, taxi drivers, some motor-carrier employees, seasonal amusement workers and some farm workers.
An employee who owns at least 20% of the business and actively manages it is exempt, so has no qualified overtime.
Hospitals, police and fire departments may use other FLSA overtime methods; the premium actually paid under those rules counts. State and local comp time counts when it's paid out, not when earned.
Federal employees: block 35 of the SF-50 shows FLSA status (N = overtime-eligible).
Puerto Rico and other territory income you exclude is added back into modified AGI.
Limits of this page
Federal rules only; states decide separately whether to follow these deductions.
The bracket estimate is rough: it multiplies the deduction by your top bracket and ignores credits and the chance of dropping a bracket.
Not tax advice. Your payroll department or a tax preparer can confirm your numbers.
Why trust this: every rule links to the IRS fact sheet, form or statute it comes from, with the date we read it. The calculator reproduces the IRS's double-time overtime example and Schedule 1-A's phase-out line by line.
Not tax advice. We republish IRS rules with dates and do the arithmetic on what you type.
Not exactly. Overtime is still taxable pay with income tax withheld and Social Security and Medicare taxes taken out, but for 2025 through 2028 you can deduct the FLSA-required premium (the “half” of time-and-a-half) up to $12,500, or $25,000 on a joint return (IRS FS-2026-13).
How much of my overtime pay can I deduct?
Only the premium above your regular rate that the FLSA requires: overtime hours over 40 x one-half x your regular rate. The IRS example: 10 overtime hours at a $20 regular rate paid double time gives $100 of qualified overtime, not $400.
Do car salesmen get the no tax on overtime deduction?
Generally no. Dealership salespeople, partsmen and mechanics are exempt from FLSA overtime under 29 U.S.C. 213(b)(10)(A), and the Supreme Court held in 2018 that service advisors are too. Overtime the FLSA doesn't require isn't qualified, even if the dealer pays it.
What is box 12 code TT on my W-2?
Code TT is the total qualified overtime your employer paid you, required on W-2s starting with 2026. It can be more than you can deduct; Schedule 1-A applies the $12,500 or $25,000 cap and the income phase-out.
What if my W-2 doesn't show my overtime in box 12?
For 2026 and later, ask your employer for a corrected W-2 (Form W-2c). Only amounts reported with code TT count, and the IRS says a substitute Form 4852 can't be used (FS-2026-13, Q22-Q23).
Which jobs qualify for no tax on tips?
Jobs on the IRS list of occupations that customarily and regularly received tips by Dec. 31, 2024, such as bartenders, wait staff, barbers and delivery drivers. Tips must be voluntary. Self-employed people in a specified service business, and employees of one, don't qualify.
Can I claim no tax on tips or overtime if married filing separately?
No. If you're married you must file a joint return, and whoever received the tips or overtime needs a Social Security number valid for work.
Not tax advice. Figures are republished from the IRS with dates; confirm with IRS.gov or a tax professional before acting.