One, Big, Beautiful Bill: How to take advantage of no tax on tips and overtime

IRS Tax Tip 2026-06, Jan. 26, 2026

The One, Big, Beautiful Bill has a significant effect on federal taxes, credits and deductions. Millions of taxpayers reported earning tips and overtime on their tax returns, many of them are veterans and people working in lower wage jobs. This relief will impact most of these taxpayers and they can start taking advantage of the deduction this filing season.

No tax on tips

Employees and self-employed individuals may deduct qualified tips received in certain qualified occupations, such as wait staff, bartenders, salon workers, personal trainers, gig economy workers, and many more who customarily and regularly receive tips might qualify.

Even better, tips earned on or before Dec. 31, 2024, and are reported on a Form W-2, Form 1099, or other statement furnished to the individual or reported directly by the individual on Form 4137 can be deducted.

• “Qualified tips” are voluntary cash or charged tips received from customers or through tip sharing
• Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income, without regard to this deduction, from the trade or business in which the tips were earned.
• The deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers)

To see examples of how “no tax on tips” is calculated, taxpayers should review this news release.

No tax on overtime

Individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay, generally, the “half” portion of “time-and-a-half” compensation, that’s required by the Fair Labor Standards Act and reported on a Form W-2, Form 1099, or other specified statement furnished to the individual.

• Maximum annual deduction is $12,500 ($25,000 for joint filers)
• Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers)
• The deduction is available for both itemizing and non-itemizing taxpayers

More information

• Frequently asked questions about the new deduction for qualified overtime compensation

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