No tax on tips and overtime, explained

Two phrases from the 2025 tax law have stuck: no tax on tips, and no tax on overtime. Both are real, both are narrower than the phrases suggest, and neither removes tax from a paycheck. They are deductions taken on the tax return, with dollar caps, an income limit and an end date. The law is Public Law 119-21, signed on July 4, 2025, which added sections 224 and 225 to the tax code.

Deduction, not exemption

Nothing about these provisions changes withholding on payday. Tips and overtime are still wages. Social Security and Medicare tax still come out of the full amount, and so does state income tax where a state charges it and has not passed its own version of the break. The federal brackets those rates come from are on the tax figures tracker. What changes is the taxable income figure on the federal return: a qualifying worker subtracts the deductible amount there, and the saving arrives as a smaller tax bill or a larger refund, once a year.

The deductions are available whether or not you itemize, so taking the standard deduction does not shut you out.

The caps

For tips, the maximum deduction is $25,000 a year. For overtime, it is $12,500, or $25,000 on a joint return.

Both run for tax years 2025 through 2028. Section 224 applies to tax years beginning after December 31, 2024, and allows no deduction for any tax year beginning after December 31, 2028. Unless Congress extends them, the 2028 return is the last one that carries either.

The income limit, in numbers

Each deduction is reduced by $100 for every $1,000 of modified adjusted gross income above $150,000, or above $300,000 on a joint return. Modified adjusted gross income here means adjusted gross income plus anything excluded under the foreign earned income and territorial income rules in sections 911, 931 and 933.

That arithmetic gives each deduction a point where it reaches zero. A single filer’s tips deduction runs out at $400,000 of modified adjusted gross income, and the overtime deduction at $275,000. On a joint return both run out at $550,000. Between the threshold and those points the deduction shrinks steadily rather than disappearing at once.

What counts as a qualified tip

A qualified tip is a cash tip received in one of the listed occupations. Cash tip is defined broadly: cash, checks, credit and debit card tips, gift cards, tokens readily exchangeable for a fixed amount such as casino chips, and electronic or mobile payments denominated in cash. Tips received through a tip pool count, whether the pool is mandatory or voluntary.

The tip has to be voluntary on the customer’s side. A mandatory service charge added to a bill is not a tip, whatever it is called on the receipt or however it is later distributed.

Self-employed people can take the deduction, but only against the net income of the business the tips were earned in, after the expenses of that business. And anyone in a specified service trade or business under section 199A is excluded, as are employees whose employer is one.

The 71 occupations Treasury listed

The law told Treasury to publish the occupations that customarily and regularly received tips on or before December 31, 2024. The final regulation appeared on April 13, 2026 and took effect on June 12, 2026. It lists 71 occupations, each with a Treasury Tipped Occupation Code, a description, illustrative examples and the related standard occupational classification code, and the current text of the regulation is the place to check your own. If your work is not on the list, the tips deduction is not available to you, however you are paid.

Beverage and Food Service (10): Bartenders, Wait Staff, Food or Beverage Servers, Non-restaurant, Dining Room and Cafeteria Attendants and Bartender Helpers, Chefs and Cooks, Food Preparation Workers, Fast Food and Counter Workers, Dishwashers, Host Staff, Restaurant, Lounge, and Coffee Shop, Bakers.

Entertainment and Events (11): Gambling Dealers, Gambling Change Persons and Booth Cashiers, Gambling Cage Workers, Gambling and Sports Book Writers and Runners, Dancers, Musicians and Singers, Disc Jockeys, Except Radio, Entertainers and Performers, Digital Content Creators, Ushers, Lobby Attendants, and Ticket Takers, Locker Room, Coatroom, and Dressing Room Attendants.

Hospitality and Guest Services (4): Baggage Porters and Bellhops, Concierges, Hotel, Motel, and Resort Desk Clerks, Maids and Housekeeping Cleaners.

Home Services (9): Home Maintenance and Repair Workers, Home Landscaping and Groundskeeping Workers, Home Electricians, Home Plumbers, Home Heating and Air Conditioning Mechanics and Installers, Home Appliance Installers and Repairers, Home Cleaning Service Workers, Locksmiths, Roadside Assistance Workers.

Personal Services (10): Personal Care and Service Workers, Private Event Planners, Private Event and Portrait Photographers, Private Event Videographers, Event Officiants, Pet and Show Animal Caretakers, Tutors, Nannies and Babysitters, Visual Artists, Floral Designers.

Personal Appearance and Wellness (11): Skincare Specialists, Massage Therapists, Barbers, Hairdressers, Hairstylists, and Cosmetologists, Shampooers, Manicurists and Pedicurists, Eyebrow and Eyelash Technicians, Makeup Artists, Exercise Trainers and Group Fitness Instructors, Tattoo Artists and Piercers, Tailors, Shoe and Leather Workers and Repairers.

Recreation and Instruction (6): Golf Caddies, Self-Enrichment Teachers, Recreational and Tour Pilots, Tour Guides, Travel Guides, Sports and Recreation Instructors.

Transportation and Delivery (10): Parking and Valet Attendants, Taxi and Rideshare Drivers and Chauffeurs, Shuttle Drivers, Goods Delivery People, Personal Vehicle and Equipment Cleaners, Private and Charter Bus Drivers, Water Taxi Operators and Charter Boat Workers, Rickshaw, Pedicab, and Carriage Drivers, Home Movers, Gas Pump Attendant.

The regulation carries examples under each entry, and the examples matter: digital content creators, pet groomers, wedding officiants, tutors and home plumbers are all on the list, while occupations that were left off do not qualify by resembling one that made it.

What counts as qualified overtime

Qualified overtime compensation is the extra pay above your regular rate that the Fair Labor Standards Act requires, and only that. In time-and-a-half, the deductible part is the half, not the whole hour. Overtime a state law or a union contract requires but the federal act does not is outside the definition, and so is a shift differential.

The statute also excludes anything that is already a qualified tip, so the same dollar cannot be counted twice.

Who cannot use either one

Both deductions require your Social Security number on the return. Married taxpayers must file a joint return; filing separately disqualifies both spouses. And both are limited to amounts reported on a Form W-2, Form 1099 or another specified statement, which means the paperwork has to match what you claim.

How it reaches your return

Employers and other payers file information returns with the IRS or the Social Security Administration and give workers statements showing tips received and the occupation of the recipient, and, for overtime, the total qualified overtime compensation paid during the year. The IRS said it would give transition relief for tax year 2025 both to workers claiming the deductions and to the employers subject to the new reporting.

If your 2025 statement did not separate the amounts, that transition relief is the reason. Keep your own record of tips and of overtime hours for that year, because the deduction is still yours to claim if the underlying amounts qualify.

The realistic size of it

A server with $12,000 of tips and income well under the threshold deducts $12,000, and the saving is that figure multiplied by the marginal rate, not the figure itself. Someone in the 12 percent bracket saves about $1,440. It is a real cut, and it is a fraction of the number in the headline. If a share of that arrives as a bigger refund, the child tax credit page covers the other change most working families will see on the same return. The refund timing page covers when the money actually arrives.