The tips and overtime deductions of 2025, and the W-2 changes that follow in 2026

On July 4, 2025, Public Law 119-21, which IRS documents call both the One, Big, Beautiful Bill Act and the Working Families Tax Cuts, was signed. Two of its provisions let workers across the United States deduct part of their income from tips and part of their overtime pay for tax years 2025 through 2028, whether they itemize or take the standard deduction. Workers could first claim them on 2025 returns. For pay earned in 2026, the reporting rules change, and for overtime that narrows what a worker can claim.

What the two deductions allow

The tips deduction covers up to $25,000 a year of what the IRS calls qualified tips: voluntary cash or charged tips from customers, including tips shared among staff, received in an occupation on the IRS list of jobs that customarily and regularly received tips on or before December 31, 2024. Mandatory service charges added to the bill are not qualified tips, according to the IRS instructions for employers. Self-employed workers cannot deduct more than their net income from the business where the tips were earned.

The overtime deduction is narrower than its nickname suggests. It covers only the part of overtime pay above a worker's regular rate that the Fair Labor Standards Act requires, generally the "half" in time-and-a-half, up to $12,500 a year, or $25,000 on a joint return. Overtime an employer pays beyond what the act requires does not count. The IRS also stresses that the deduction does not make overtime tax-free: the pay generally remains subject to income tax withholding, Social Security tax and federal unemployment tax.

Both deductions are reduced once modified adjusted gross income goes above $150,000, or $300,000 for joint filers. A claimant needs a valid Social Security number, and married couples must file jointly.

Who counts as tipped

The IRS list gives each occupation a Treasury Tipped Occupation Code and groups them under eight headings, from beverage and food service to transportation and delivery. It goes well beyond restaurants. Alongside bartenders, wait staff and baristas, it includes digital content creators such as streamers and podcasters, home plumbers and electricians, hairstylists, tutors, rideshare drivers, delivery workers and gas pump attendants. When the Treasury and the IRS issued guidance for the first year in November 2025, their release put the number of workers who report tipped wages at about 6 million.

Not every tipped worker qualifies. The IRS said in July 2025 that self-employed people in a specified service trade or business under section 199A of the tax code, and employees whose employer is in one, are not eligible. The November 2025 guidance gave transition relief for 2025 to workers who receive tips in such a business.

How the first year worked

For 2025, employers were not required to show tips or overtime separately on Forms W-2 or 1099, so the IRS let workers work out the amounts from other records. Its examples show how. A restaurant server whose 2025 W-2 showed $18,000 of Social Security tips in box 7 could use that figure. A worker whose pay statement showed $15,000 of total overtime pay could count $5,000, one third of it, as the premium. For an employee paid double time, the IRS divided the overtime total by four. Both deductions are worked out on a new form, Schedule 1-A.

What changes for 2026 pay

The 2026 version of the W-2 has new entries. Employers report the total cash tips an employee reported to them in box 12 with code TP, and list up to two occupation codes in a new box 14b. If any of the tips came from a job that is not on the list, the code "000" must be one of them. Qualified overtime goes in box 12 with code TT.

The IRS spelled out what that means for overtime in updated questions and answers on August 6, 2026. An employer must report the full premium paid, even if it is more than the $12,500 limit; the IRS example is an employee with $30,000 of qualified overtime, all of which goes in code TT. For tax years after 2025, the 2025 relief no longer applies, and the IRS says employees may not count any overtime beyond the amount in code TT. Employers also cannot reduce withholding to reflect the deduction unless the employee hands in a new Form W-4. The IRS says the 2026 W-4 and its online Tax Withholding Estimator were updated to allow for the deduction.

The tip rules described by the IRS in July 2025 cover tips reported on a W-2, a Form 1099 or another statement given to the worker, and also tips the worker reports directly on Form 4137.

How long it lasts

Both deductions apply only to tax years 2025 through 2028; the 2026 W-2 instructions describe them as applying to tax years beginning after 2024 and ending before 2029. Returns for 2026 are filed in 2027. The IRS notes that its questions and answers are not published in the Internal Revenue Bulletin and that, where they misstate the law for a particular taxpayer, the law controls. For working out a claim, it points workers to the Schedule 1-A instructions, its questions and answers on overtime and the worked examples in its November 2025 guidance.