Quick Answer
Quick Answer: Under H.R.1 (signed into law July 2025), employees and self-employed workers who receive voluntary tips in an occupation on the Treasury list of tipped occupations qualify for the tips tax deduction — including 1099 gig workers such as rideshare and app-based delivery drivers. For overtime, FLSA non-exempt employees qualify, but only the overtime premium is deductible: the pay above your regular rate, such as the “half” in time-and-a-half, not your whole overtime paycheck. Both deductions taper above $150,000 of MAGI ($300,000 MFJ), losing $100 for every whole $1,000 of income above that — a gradual reduction, not a cliff. Salaried exempt employees and independent contractors do not qualify for the overtime deduction.
Key Takeaways
- Tips deduction: Employees and self-employed workers in an occupation on the Treasury tipped-occupation list (servers, bartenders, hairstylists, valets, rideshare and app-based delivery drivers, and more than 70 others); voluntary tips only
- Overtime deduction: FLSA non-exempt employees; only the premium above the regular rate (the “half” in time-and-a-half) is deductible, not the whole overtime paycheck
- Self-employed tips: The deduction cannot exceed net income from the business where the tips were earned, and tips received in a specified service trade or business do not qualify
- Income phase-out: Both deductions shrink by $100 per whole $1,000 of MAGI above $150,000 (single) or $300,000 (MFJ)
- Deduction caps: Tips: $25,000/year; Overtime: $12,500/year single ($25,000 MFJ)
- FICA still applies: Both deductions reduce federal income tax only -- Social Security and Medicare taxes are unchanged
- NOT eligible: Salaried exempt employees and independent contractors (overtime deduction); workers whose occupation is not on the Treasury list (tips deduction); married taxpayers filing separately (both)
- Effective dates: Tax years 2025-2028 (signed into law July 2025)
Law Status
H.R.1, the "One Big Beautiful Bill Act," was signed into law in July 2025. The tips and overtime tax deductions are effective for tax years 2025 through 2028. They sunset after 2028 unless Congress passes new legislation to extend them. Consult a tax professional for how these provisions apply to your situation.
Overview: What H.R.1 Provides for Tips and Overtime
H.R.1, commonly referred to as the "One Big Beautiful Bill," was signed into law in July 2025 and includes two major tax provisions that benefit millions of American workers: a federal income tax deduction for tip income and a federal income tax deduction for overtime pay. Under IRC §63(b), both are subtracted after adjusted gross income is figured, so they do not lower your adjusted gross income, but you can claim them whether you take the standard deduction or itemize.
However, these deductions are not universal. Specific eligibility requirements determine who qualifies, and understanding these requirements is critical before planning around the tax savings. This guide breaks down the qualification criteria for both provisions, explains the FLSA definitions that underpin eligibility, and walks through real-world examples so you can determine whether you qualify.
For a deep dive on how tips are taxed under current law, see our complete guide to tips taxation in 2026. For details on overtime taxation and withholding mechanics, see Does Overtime Get Taxed More?
Who Qualifies for the Tips Tax Deduction
The Treasury List of Tipped Occupations
Tips deduction eligibility starts with your occupation, not your employment status. IRC §224(d) allows the deduction for qualified tips: cash or charged tips received in an occupation that customarily and regularly received tips on or before December 31, 2024, as provided by the Treasury. Treasury and the IRS published that list as final regulations in April 2026: more than 70 occupations in eight categories, each with a three-digit Treasury Tipped Occupation Code (TTOC). The FLSA's “more than $30 per month” tipped-employee definition is a separate labor-law test; §224 does not use it.
The key factors are:
- Your occupation must be on the Treasury list
- The tips must be voluntary: paid without any consequence for nonpayment, not negotiated, and set by the person paying. Mandatory service charges the customer cannot change or decline do not count
- You can be a W-2 employee or self-employed, including a 1099 gig worker. The tips must appear on a Form W-2, 1099-NEC, 1099-MISC or 1099-K, or be reported by you on Form 4137
- If you are self-employed, the deduction cannot exceed your net income (before this deduction) from the business in which you received the tips, and tips received in a specified service trade or business (IRC §199A(d)(2)) do not qualify. Employees whose employer is in a specified service trade or business are also excluded
Occupations That Typically Qualify
The following occupations appear on the Treasury list (TTOC code shown). Check the full list for your own job title:
| Occupation | Industry | Typical Tip Sources | On the Treasury List? |
|---|---|---|---|
| Restaurant server | Food service | Table tips, credit card tips | Yes (TTOC 102) |
| Bartender | Food service / hospitality | Bar tips, tab tips | Yes (TTOC 101) |
| Hotel bellhop / valet | Hospitality | Luggage handling, parking tips | Yes (TTOC 301, 801) |
| Hairstylist / barber | Personal services | Service tips from clients | Yes (TTOC 603) |
| Nail technician / spa worker | Personal services | Service tips from clients | Yes (TTOC 605, 601, 602) |
| Casino dealer | Gaming / entertainment | Dealer tips (tokes) | Yes (TTOC 201) |
| Delivery driver (employee or app-based) | Food service / delivery | Delivery tips | Yes (TTOC 804), employee or self-employed |
| Taxi / rideshare driver | Transportation | Rider tips | Yes (TTOC 802), employee or self-employed |
Income Caps and Phase-Outs for Tips
Under H.R.1, the tips deduction includes both an annual cap and an income-based phase-out:
| Filing Status | Max Deduction | Phase-Out Starts (MAGI) | Full Deduction Reaches $0 |
|---|---|---|---|
| Single | $25,000 | $150,000 | $400,000 |
| Married Filing Jointly | $25,000 | $300,000 | $550,000 |
| Married Filing Separately | Not eligible | — | — |
| Head of Household | $25,000 | $150,000 | $400,000 |
Married filing separately has no cap because it has no deduction. H.R.1 allows a married taxpayer to claim the tips deduction only on a joint return, so an MFS filer is barred outright rather than capped or phased out. Filing a joint return with your spouse is what restores eligibility.
Source: Public Law 119-21, the "One Big Beautiful Bill Act," signed July 4 2025, §70201 (IRC §224). Effective for tax years 2025-2028. Phase-out mechanics per IRC §224(b)(2)(A) and IRS Schedule 1-A (Form 1040), Part II. Occupation list and self-employed rules: Treasury final regulations, April 13, 2026, and IRC §224(c)-(d).
How the Phase-Out Works
The phase-out is a fixed dollar reduction: above the threshold, your deduction drops by $100 for every whole $1,000 of modified adjusted gross income. A single filer with $162,500 in MAGI is $12,500 over, so the deduction falls by $1,200 — from $25,000 to $23,800, not to half. That taper is gentle enough that a full $25,000 deduction does not disappear until $400,000 of MAGI. If you are claiming less than the cap, your deduction runs out sooner, because the same dollar reduction eats a smaller deduction faster. Most tipped workers earn well below the threshold and receive the full deduction.
Who Qualifies for the Overtime Tax Deduction
FLSA Overtime Eligibility: Non-Exempt Employees
The overtime tax deduction under H.R.1 is tied to the FLSA definition of overtime-eligible workers. Under the FLSA, non-exempt employees are entitled to overtime pay at a rate of at least 1.5 times their regular hourly rate for hours worked beyond 40 in a workweek. These are the same workers who qualify for the H.R.1 overtime deduction.
Only the Overtime Premium Is Deductible
The deduction covers qualified overtime compensation: the part of FLSA-required overtime pay that is in excess of your regular rate (IRC §225(c)). It is not your whole overtime paycheck. If you earn $20 an hour and are paid $30 for an overtime hour, only the $10 premium counts toward the deduction; the other $20 is ordinary wages. Overtime pay the FLSA does not require does not count either: if your employer pays double time, only the half-time premium the FLSA requires qualifies, and overtime owed only under state law or a union contract does not qualify.
The distinction between exempt and non-exempt is critical:
- Non-exempt (qualifies): Hourly workers who are entitled to overtime pay under the FLSA. Typically paid by the hour, tracks time, receives overtime premium.
- Exempt (does NOT qualify): Salaried workers who meet specific duties tests and salary thresholds for executive, administrative, professional, or outside sales exemptions. Not entitled to FLSA overtime.
Occupations That Typically Qualify for Overtime Deduction
| Worker Category | Examples | FLSA Status |
|---|---|---|
| Manufacturing / factory | Assembly line workers, machinists, quality inspectors | Non-exempt |
| Construction / trades | Electricians, plumbers, carpenters, laborers | Non-exempt |
| Healthcare (non-exempt) | Nurses (hourly), CNAs, medical technicians, EMTs | Non-exempt |
| Trucking / transportation | Delivery drivers, warehouse drivers, local route drivers | Non-exempt |
| Retail / service | Retail associates, cashiers, customer service workers | Non-exempt |
| Food service / hospitality | Line cooks, dishwashers, housekeeping, front desk hourly | Non-exempt |
| Warehouse / logistics | Pickers, packers, forklift operators, shipping clerks | Non-exempt |
| Maintenance / janitorial | Custodians, groundskeepers, maintenance technicians | Non-exempt |
| Public safety (non-exempt) | Corrections officers, dispatchers, certain first responders | Non-exempt |
Overtime Deduction Caps and Phase-Outs
| Filing Status | Max Deduction | Phase-Out Start (MAGI) | Full Deduction Reaches $0 |
|---|---|---|---|
| Single | $12,500 | $150,000 | $275,000 |
| Married Filing Jointly | $25,000 | $300,000 | $550,000 |
| Married Filing Separately | Not eligible | — | — |
| Head of Household | $12,500 | $150,000 | $275,000 |
Married filing separately is barred from the overtime deduction on the same terms as the tips deduction — H.R.1 allows a married taxpayer to claim it only on a joint return.
Source: H.R.1, signed into law July 2025, §70202 (IRC §225), and the IRS questions and answers on qualified overtime compensation. See our overtime tax guide for detailed savings calculations by wage level.
Who Does NOT Qualify for H.R.1 Deductions
Understanding who is excluded is just as important as knowing who qualifies. The exclusions differ between the two deductions: independent contractors can take the tips deduction in a listed occupation, but not the overtime deduction. The following categories of workers generally do not qualify for the deduction named:
Not Eligible for the Tips Deduction
- Self-employed workers in a specified service trade or business: Gig workers, freelancers and other self-employed individuals can claim the tips deduction when their occupation is on the Treasury list — including rideshare drivers and app-based delivery workers classified as independent contractors. They cannot claim it for tips received in a specified service trade or business as defined in IRC §199A(d)(2), and an employee whose employer is in such a business is excluded as well.
- Self-employed tips above the business's net income: A self-employed worker's deduction cannot exceed the net income, before this deduction, of the business in which the tips were earned. In the Treasury regulations' own example, a self-employed salon owner with $20,000 of qualified tips and $15,000 of net income from the salon can deduct only $15,000.
- Workers who receive service charges (not tips): Mandatory service charges, automatic gratuities, and banquet fees are classified as regular wages, not tips. Income from service charges does not qualify for the tips deduction.
- Workers in occupations not on the Treasury list: Workers who occasionally receive tips but whose occupation is not on the list (for example, an office worker who receives a holiday tip from a client) do not have qualified tips.
- Married taxpayers filing separately: H.R.1 allows a married taxpayer to claim the tips deduction only on a joint return. A married-filing-separately return produces no deduction at all, at any income level. This is a categorical bar, not a reduced cap — filing jointly with your spouse is what restores eligibility.
- Workers far above the income phase-out: A worker claiming the full $25,000 tips deduction loses all of it at $400,000 of MAGI (single) or $550,000 (MFJ). Between the $150,000/$300,000 threshold and those points the deduction is reduced, not eliminated.
Not Eligible for the Overtime Deduction
- Salaried exempt employees: Managers, executives, administrative professionals, IT professionals, and other exempt workers under the FLSA do not qualify. Even if they work more than 40 hours per week, they are not entitled to FLSA overtime and cannot claim the deduction.
- Independent contractors: Self-employed individuals who work long hours cannot claim the overtime deduction, because FLSA overtime is owed only to employees who are covered by the FLSA and not exempt from it. (This exclusion applies to the overtime deduction only; see the tips rules above.)
- The base-rate part of overtime pay: Even for eligible workers, the regular-rate portion of each overtime hour is ordinary wages. Only the premium above the regular rate is deductible.
- Certain transportation workers: Some long-haul truckers and certain transportation workers are exempt from FLSA overtime under the Motor Carrier Act exemption. These workers may not qualify.
- Agricultural workers: Certain agricultural employees have different overtime rules under the FLSA and may not qualify for the standard overtime deduction.
- Married taxpayers filing separately: The same joint-return requirement applies to the overtime deduction. A married-filing-separately return produces no overtime deduction at any income level.
- Workers far above the income phase-out: A worker claiming the full $12,500 overtime deduction loses all of it at $275,000 of MAGI (single); a joint filer claiming $25,000 loses it at $550,000.
Employee Misclassification
If you believe you are incorrectly classified as exempt (salaried) when you should be non-exempt (hourly), consult your HR department or a labor law attorney. Misclassification affects both your overtime pay rights and your eligibility for the H.R.1 deduction. The U.S. Department of Labor provides guidance on the FLSA exempt vs. non-exempt criteria (opens in new tab).
Real-World Examples: Do You Qualify?
The following examples illustrate how the eligibility rules apply to common worker scenarios. These are simplified for educational purposes -- consult a tax professional for guidance on your specific situation.
Example 1: Restaurant Server (Tips Deduction)
Maria works as a server at a sit-down restaurant. She is a W-2 employee earning $2.13/hour in base pay, full time at 40 hours a week for 52 weeks, plus approximately $35,000 per year in tips. She reports all tips to her employer with a monthly tip statement. She files single and has no other income.
- Occupation on the Treasury list? Yes -- wait staff (TTOC 102)
- W-2 employee? Yes
- MAGI under phase-out? Yes (about $39,430: $4,430 of base pay, $2.13 × 2,080 hours, plus $35,000 of tips)
- Eligible for tips deduction? Yes
- Potential savings: After the 2026 standard deduction of $16,100, her taxable income is about $23,330, and the federal income tax on it is about $2,552 (10% of the first $12,400 plus 12% of the remaining $10,930). Her tips deduction is capped at $25,000, which is more than that $23,330, so it brings her taxable income to zero and saves about $2,552 per year in federal income tax: all of it, but less than 12% of $25,000, because a deduction cannot take taxable income below zero
Example 2: Bartender Working Overtime (Both Deductions)
James works as a bartender at a busy nightclub. He is a W-2 non-exempt employee earning $15/hour plus tips. He regularly works 50 hours per week (10 hours of overtime), 52 weeks a year. His annual tips total $28,000. His overtime pay totals approximately $11,700 per year ($22.50 × 10 hours × 52 weeks), of which $3,900 is the premium above his regular rate ($7.50 × 10 × 52). He files single and has no other income.
- Tips deduction: Bartenders are on the Treasury list (TTOC 101). Could deduct $25,000 of his $28,000 in tips (the cap).
- Overtime deduction: Qualifies as FLSA non-exempt. Can deduct only the $3,900 premium, not the full $11,700 of overtime pay (well under the $12,500 cap).
- Combined potential savings: His income is about $70,900 ($31,200 of regular pay, $15 × 40 hours × 52 weeks, plus $11,700 of overtime pay and $28,000 of tips). After the 2026 standard deduction of $16,100, his taxable income is about $54,800, and the federal income tax on it is about $6,768 (10% of the first $12,400, 12% of the next $38,000 and 22% of the rest, above $50,400). Deducting $28,900 ($25,000 + $3,900) brings his taxable income to $25,900 and the tax to about $2,860, which saves about $3,908 per year in federal income tax: the part of the deduction that comes out of the 22% bracket saves $968, and the rest comes out of the 12% bracket and saves $2,940.
Example 3: App-Based Delivery Driver (Independent Contractor -- Tips Yes, Overtime No)
Alex works as a delivery driver for a food delivery app. He receives tips from customers and works more than 40 hours per week. He is classified as an independent contractor (1099), not a W-2 employee.
- Tips deduction: Qualifies. App-based delivery drivers are on the Treasury list (TTOC 804, Goods Delivery People), and self-employed workers can claim the deduction. His deduction is capped at $25,000 and cannot exceed his net income from delivery work (his delivery earnings, including tips, minus business expenses such as vehicle costs).
- Overtime deduction: Does not qualify. As an independent contractor he is not owed FLSA overtime, so he has no qualified overtime compensation however many hours he works.
- Still owed: The tips deduction reduces federal income tax only; his tips and earnings remain subject to self-employment tax.
Example 4: Manufacturing Worker (Overtime Deduction Only)
Sarah works as a non-exempt hourly employee at a manufacturing plant earning $25/hour. She regularly works 48 hours per week (8 hours of overtime), 52 weeks a year. Her annual overtime pay totals approximately $15,600 ($37.50 × 8 hours × 52 weeks), of which $5,200 is the premium above her regular rate ($12.50 × 8 × 52). She files single and has no other income.
- Tips deduction: Does not qualify -- manufacturing is not on the Treasury list of tipped occupations
- Overtime deduction: Qualifies as FLSA non-exempt hourly worker. Can deduct the $5,200 premium -- not the full $15,600 of overtime pay -- which is under the $12,500 cap. The $12,500 cap limits the deduction; it is not applied to total overtime pay
- Potential savings: Her income is about $67,600 ($52,000 of regular pay, $25 × 40 hours × 52 weeks, plus $15,600 of overtime pay). After the 2026 standard deduction of $16,100, her taxable income is about $51,500, and the federal income tax on it is about $6,042 (10% of the first $12,400, 12% of the next $38,000 and 22% of the $1,100 above $50,400). Deducting the $5,200 premium brings her taxable income to $46,300 and the tax to about $5,308, which saves about $734 per year in federal income tax: 22% of the $1,100 that was in the 22% bracket ($242) plus 12% of the other $4,100 ($492)
Example 5: Salaried Restaurant Manager (Does NOT Qualify)
Does NOT Qualify
David is a salaried restaurant manager earning $65,000 per year. Although he works in the restaurant industry and occasionally receives tips from staff, he is classified as an exempt employee under the FLSA. He regularly works 50+ hours per week but is not entitled to overtime pay. David does not qualify for either the tips deduction (restaurant manager is not an occupation on the Treasury list) or the overtime deduction (exempt from FLSA overtime).
Tips vs. Overtime Deduction: Side-by-Side Comparison
The two deductions share similar structures but have important differences. The table below summarizes the key eligibility and benefit details for each provision.
| Feature | Tips Deduction | Overtime Deduction |
|---|---|---|
| Who qualifies | Employees and self-employed workers in an occupation on the Treasury tipped-occupation list | FLSA non-exempt employees |
| What is deductible | Voluntary cash or charged tips | Only the premium above the regular rate (the “half” in time-and-a-half) |
| Deduction type | Taken after AGI (does not lower AGI); no itemizing required | Taken after AGI (does not lower AGI); no itemizing required |
| Annual cap (single) | $25,000 | $12,500 |
| Annual cap (MFJ) | $25,000 | $25,000 |
| Phase-out (single) | Starts $150,000 −$100 per $1,000 |
Starts $150,000 −$100 per $1,000 |
| Phase-out (MFJ) | Starts $300,000 −$100 per $1,000 |
Starts $300,000 −$100 per $1,000 |
| Reduces FICA? | No | No |
| Effective years | 2025-2028 | 2025-2028 |
| Independent contractors | Eligible in a listed occupation (limited to net business income; specified service businesses excluded) | Not eligible |
| Salaried exempt employees | Depends on the occupation, not FLSA status | Not eligible |
| Married filing separately | Not eligible | Not eligible |
| Can claim both? | Yes, if eligible for both (separate caps apply) | |
Source: H.R.1, the "One Big Beautiful Bill Act," signed into law July 2025. For detailed calculations, use the Tips Tax Calculator or Overtime Tax Calculator.
Employer Obligations and Reporting Requirements
Employers play a critical role in enabling employees to claim these deductions. Under H.R.1 provisions, employers are generally required to:
For Tip Income
- Collect tip reports: Continue collecting employees' monthly tip statements (written or electronic; the IRS retired Form 4070 at the end of 2024) by the 10th of each month
- Report on W-2: Accurately report all tip income on employees' W-2 forms in Box 7 (Social Security tips) and Box 8 (Allocated tips, if applicable)
- Withhold FICA: Continue withholding Social Security and Medicare taxes on reported tip income -- the deduction does not change FICA obligations
- File Form 8027: Large food and beverage establishments must continue filing Form 8027 (Annual Information Return of Tip Income and Allocated Tips)
- Adjust income tax withholding: Employers may need to adjust federal income tax withholding to account for the tips deduction, though the specific IRS guidance may vary
For Overtime Pay
- Track overtime hours: Accurately record hours worked beyond 40 per week for all non-exempt employees
- Report overtime pay on W-2: Ensure overtime pay is properly reported so employees can calculate their deduction
- Continue FICA withholding: Withhold the full 7.65% FICA on all overtime earnings -- the deduction does not reduce payroll taxes
- Update payroll systems: Payroll providers may need to update systems to separately track and report overtime pay for deduction purposes
Employee Record-Keeping
Even though your employer reports tips and overtime, you should keep your own records. For tips, maintain a daily tip log using IRS Publication 531 (Reporting Tip Income) (opens in new tab). For overtime, keep copies of your timesheets or pay stubs showing overtime hours and pay rates. These records support your deduction claims if questioned by the IRS.
Effective Dates and Sunset Provisions
Under H.R.1 (signed into law July 2025), the tips and overtime deductions share a common timeline:
| Milestone | Date / Status |
|---|---|
| Effective start | Tax year 2025 |
| Sunset | After tax year 2028 |
| Duration | 4 tax years (2025, 2026, 2027, 2028) |
| Deduction type | Taken after AGI under IRC §63(b); does not lower AGI; available whether or not you itemize |
| State conformity | Varies by state -- adoption is mixed as of August 2026: a few states (e.g., Indiana, Michigan) conform or offer a matching state deduction, while several large states (California, New York, Illinois) do not. Verify with your state. |
Temporary Provisions
Both the tips and overtime deductions are temporary measures that sunset after 2028. Congress would need to pass new legislation to extend them beyond 2028. Plan your finances accordingly and consult a tax professional about long-term tax planning.
For the full text of H.R.1, visit Congress.gov (opens in new tab).
Important: FICA Taxes Are NOT Reduced
One of the most common misunderstandings about the H.R.1 provisions is the scope of the deductions. Both the tips and overtime deductions reduce federal income tax only. They do not reduce:
- Social Security tax (6.2%) -- still applies to all tip and overtime earnings up to the $184,500 wage base in 2026
- Medicare tax (1.45%) -- still applies to all earnings, with an additional 0.9% on earnings above $200,000 for single filers
- State income taxes -- unless your state specifically conforms to the H.R.1 provisions (adoption varies by state as of August 2026 -- verify with your state's tax agency)
This distinction matters because FICA taxes represent 7.65% of every dollar earned. Maria in Example 1, whose tips deduction saves her about $2,552 in federal income tax, still owes about $2,678 of FICA on her $35,000 of tips ($35,000 × 7.65%). However, this also means your Social Security benefits are not reduced -- all wages remain reported for benefit calculation purposes.
If you want pre-tax savings that also reduce FICA, consider options like a 401(k) or a Dependent Care FSA.
How We Calculate These Figures
The deduction amounts and phase-out figures above start from your reported tip or qualified overtime income and your Modified Adjusted Gross Income, apply the H.R.1 deduction caps and income phase-out thresholds for your filing status, and reduce the deduction by $100 for each whole $1,000 of MAGI above the phase-out floor, rounding down to a whole number of $1,000 steps as IRS Schedule 1-A does. The resulting deduction lowers federal taxable income only — FICA (Social Security and Medicare) is calculated separately on full wage and tip income, unaffected by the deduction.
Frequently Asked Questions
Employees and self-employed workers qualify for the H.R.1 tips tax deduction if they receive voluntary tips in an occupation on the Treasury list of occupations that customarily and regularly received tips on or before December 31, 2024. The list, published as final regulations in April 2026, covers more than 70 occupations, including restaurant servers, bartenders, valets, hairstylists, hotel bellhops, and taxi, rideshare and app-based delivery drivers. Self-employed workers, including 1099 gig workers, can deduct tips only up to their net income from the business in which the tips were earned, and not if that business is a specified service trade or business. A married taxpayer must also file a joint return: H.R.1 denies the tips deduction to anyone filing married filing separately, at any income level.
FLSA-eligible non-exempt hourly workers qualify for the overtime tax deduction. This includes workers in manufacturing, construction, healthcare (non-exempt), trucking, retail, food service, warehouse and logistics, and maintenance. Salaried exempt employees such as managers, executives, and administrative professionals do not qualify, and neither do independent contractors. FLSA overtime is hours worked beyond 40 per week, paid at a rate of at least 1.5 times the regular rate, and only the overtime premium is deductible: the part of that pay above your regular rate, such as the half in time-and-a-half. A worker earning $20 an hour who is paid $30 for an overtime hour can deduct $10 of it. A married taxpayer must also file a joint return: H.R.1 denies the overtime deduction to anyone filing married filing separately.
Yes, but gradually. Above $150,000 of modified adjusted gross income ($300,000 on a joint return), both deductions are reduced by $100 for every whole $1,000 of income over the threshold. There is no cliff: a single filer at $175,000 loses $2,500 of the deduction, not all of it. A full $25,000 tips deduction does not reach zero until $400,000 of MAGI; a full $12,500 overtime deduction reaches zero at $275,000. The tips deduction is capped at $25,000 per year, while the overtime deduction is capped at $12,500 per year for single filers ($25,000 for MFJ).
Yes, if their occupation is on the Treasury list of tipped occupations. IRC Section 224 allows the deduction to employees and self-employed individuals, and the IRS confirms that gig workers and other self-employed individuals can qualify. For a self-employed worker, the deduction cannot exceed net income from the business in which the tips were earned, and tips received in a specified service trade or business do not qualify. The tips must be reported on a Form W-2, 1099-NEC, 1099-MISC or 1099-K, or by the worker on Form 4137. Independent contractors cannot take the separate overtime deduction, because FLSA overtime is owed only to non-exempt employees.
Yes, if you qualify for both. A restaurant server who is a tipped employee and also works overtime hours beyond 40 per week could potentially claim both deductions, each subject to its own separate cap and phase-out rules. The combined benefit is subject to the individual limits of each provision. Consult a tax professional for guidance on claiming multiple H.R.1 deductions.
No. Both the tips and overtime deductions under H.R.1 reduce federal income tax only. FICA taxes -- Social Security (6.2%) and Medicare (1.45%) -- still apply to all tip and overtime earnings. This means the deductions do not affect your Social Security benefit calculations, since all wages remain reported for Social Security purposes.
H.R.1 was signed into law in July 2025. Both the tips and overtime deductions are effective for tax years 2025 through 2028. They sunset after the 2028 tax year unless Congress passes new legislation to extend them.
Employers must continue to report tip income and overtime pay accurately on employees' W-2 forms. For tips, employers are required to collect employees' monthly tip reports (a signed written or electronic statement; the IRS retired Form 4070 at the end of 2024) and withhold applicable taxes. For overtime, employers must accurately track and report overtime hours and pay. Some employers may adjust withholding to account for the new deductions, but the deduction is ultimately claimed on your personal tax return.
Next Steps: Determine Your Eligibility
The H.R.1 tips and overtime deductions could provide meaningful tax relief for millions of American workers. To determine whether you are likely to qualify:
- Check your worker classification. W-2 employees can qualify for both deductions. If you are paid on a 1099 as an independent contractor, you can still qualify for the tips deduction in a listed occupation, but not for the overtime deduction.
- For tips: Is your occupation on the Treasury list of tipped occupations, and are your tips voluntary? If yes, you likely qualify for the tips deduction. If you are self-employed, it is limited to your net income from that work.
- For overtime: Are you classified as FLSA non-exempt (hourly, eligible for overtime pay at 1.5x)? If yes, you likely qualify for the overtime deduction on the premium portion of your overtime pay.
- Check your income. Is your MAGI below $150,000 (single) or $300,000 (MFJ)? If yes, you would receive the full deduction. Between the thresholds, a partial deduction applies.
- Keep records. Maintain a daily tip log and copies of your pay stubs showing overtime hours.
- Consult a tax professional. A qualified tax advisor can provide guidance specific to your situation and help you claim these deductions correctly.
For a detailed look at how tips are currently taxed, read our complete tips tax guide for 2026. To understand overtime taxation and withholding mechanics, see our guide on whether overtime gets taxed more.
Sources
- H.R.1 "One Big Beautiful Bill Act" Full Text (Congress.gov) (opens in new tab)
- U.S. Department of Labor: Fact Sheet #15 -- Tipped Employees Under the FLSA (opens in new tab)
- U.S. Department of Labor: Overtime Pay (FLSA) (opens in new tab)
- U.S. Department of Labor: Fact Sheet #17A -- Exemption for Executive, Administrative, Professional, Computer and Outside Sales Employees (opens in new tab)
- IRS: Tip Recordkeeping and Reporting (opens in new tab)
- IRS Publication 531: Reporting Tip Income (opens in new tab)
- IRS Fact Sheet FS-2025-03: Tax Deductions for Working Americans and Seniors (opens in new tab)
- IRS IR-2026-49: Final Regulations Listing Occupations That Receive Tips (opens in new tab)
- Federal Register: Occupations That Customarily and Regularly Received Tips; Definition of Qualified Tips (final rule, April 13, 2026) (opens in new tab)
- IRS: Questions and Answers About the New Deduction for Qualified Overtime Compensation (opens in new tab)
- IRS Tax Inflation Adjustments for Tax Year 2026 (opens in new tab)
Important Disclaimer
Disclaimer: This content is for educational and informational purposes only and does not constitute financial, tax, or legal advice. Individual circumstances vary, and you should consult with a qualified tax professional before making decisions about tip or overtime tax deductions. The information in this guide is based on H.R.1 as signed into law in July 2025. While we strive for accuracy, laws and regulations change frequently. Verify your FLSA classification with your employer or a labor law professional. Data current as of August 2026.
Content reviewed by Mark at Markco Labs. Learn more about our accuracy standards.