The tips and overtime deduction: how to claim it

You can deduct up to $25,000 of qualified tips and up to $12,500 of qualified overtime ($25,000 filing jointly), even if you take the standard deduction. You need a Social Security number valid for employment and, if married, a joint return.

By the Vordana Tax team · November 4, 2026

The One Big Beautiful Bill Act created two new deductions for workers, in effect from 2025 through 2028: one for qualified tips and one for qualified overtime. You claim them on Schedule 1-A, and they lower your taxable income even if you don't itemize. Not everything counts: only voluntary tips in certain occupations and, of your overtime pay, only the extra part the law requires. Someone who files with an ITIN can't claim them.

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What are these two deductions?

They are two separate deductions, and if you qualify for both you can claim both. According to the IRS, they are figured on the new Schedule 1-A, Additional Deductions, and the total goes on Form 1040, line 13b.

They are available whether you take the standard deduction or itemize: they come off on top of either one. Your tips and overtime still show up as wages on your W-2; the deduction lowers your income tax and does not change the Social Security and Medicare tax withheld from your pay.

Which tips count?

According to the IRS, qualified tips are voluntary cash or charged tips you receive from customers, including shared tips. They also have to come from work in an occupation on the IRS list of occupations that customarily and regularly received tips on or before December 31, 2024.

The list includes, for example, wait staff, bartenders, cooks, barbers and hairstylists, manicurists, housekeeping cleaners, parking and valet attendants, taxi and rideshare drivers, and delivery people, app-based delivery included.
Only voluntary tips count: a charge the customer has to pay is not a voluntary tip.
The tips must be reported on a W-2, a 1099 or another statement furnished to you, or reported by you on Form 4137.
If you are self-employed, the deduction can't be more than the net income of the business where you earned the tips, and people working in a specified service trade or business (SSTB) can't claim it.

Which overtime counts? Only the premium

Not all of your overtime pay is deductible. According to the IRS, only the part above your regular rate that the Fair Labor Standards Act (FLSA) requires counts: the "half" of "time-and-a-half" for hours worked over 40 in a workweek. The regular-rate part of the pay for those hours is not deductible.

Pay above what that law requires doesn't count either: if your employer pays double time, only the extra half of time-and-a-half qualifies, and extra pay for weekends or holidays given by employer policy, a union contract or another law doesn't count. If your job is exempt from FLSA overtime, overtime you are paid is not qualified. If you aren't sure whether you're covered, the IRS suggests asking your employer.

Limits and the income phase-out

Tips: up to $25,000 per return, the same limit for single filers and for married couples filing jointly.
Overtime: up to $12,500, or $25,000 if you file jointly.
Both deductions shrink when your modified adjusted gross income is over $150,000 ($300,000 filing jointly): each is reduced by 10% of the amount your income is over that line, down to zero.
They are temporary: according to the IRS, they apply from 2025 through 2028.

Requirements: Social Security number and a joint return

According to the IRS, to claim either deduction you need a Social Security number valid for employment, and if you're married you have to file a joint return.

That means someone who files with an ITIN can't claim the tips deduction or the overtime deduction, even if they receive tips or work overtime. Married people filing separately can't claim them either. If you and your spouse are deciding how to file, our guide "Married filing jointly vs. separately" compares the two.

Where they show up on your W-2 or 1099

Tips you reported to your employer: they are in box 7 of your W-2 (Social Security tips) and are part of your wages in box 1.
The 2025 W-2 has no box of its own for these deductions: according to the IRS, your employer may report qualified overtime in box 14 or on a separate statement. If it didn't, you can figure it from your pay stubs: if they show the premium separately, use that amount; if they show total overtime paid at time-and-a-half, use one-third; if you're paid double time and they show the total, use one-quarter.
The 2026 W-2 has new codes: box 12, code TP (cash tips reported to the employer), box 12, code TT (qualified overtime) and box 14b (the Treasury Tipped Occupation Code).
If you're self-employed, your payments come on a 1099-NEC, 1099-MISC or 1099-K, which often don't separate tips. The IRS accepts, for example, a daily log of each job and the tip you received.

How to claim them on Vordana Tax

Your W-2 step has a "Tips & overtime deductions" section. Check "This job was in a customarily-tipped occupation" so the box 7 tips count, and in "Qualified overtime compensation received this year" enter only the premium, not all of your overtime pay. If you received tips you didn't report to your employer, the "Unreported Tip Income" step (Form 4137) adds them too. On a 2026 W-2, the software reads box 12 codes TT and TP as you type them.

The software applies the limits, the income phase-out and the married-couple rule, prepares Schedule 1-A and carries the total to line 13b of your Form 1040, which is e-filed to the IRS after a free review. If you file with an ITIN, leave this section blank. If your tips or overtime came on a 1099 because you're self-employed, talk to a tax expert before claiming them: inside your return, open "Help from our staff". Expert help is an optional paid service.

If you already filed without the deduction

If you already filed and didn't claim a deduction you were entitled to, you can correct your return with Form 1040-X, the amended return. According to the IRS, to get a refund you generally have 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later.

Vordana Tax prepares Form 1040-X for 2025 returns and prints it in front of your corrected Form 1040, for you to sign and send to the IRS by mail. Vordana Tax does not e-file Form 1040-X. The steps are in our guide "How to amend a tax return (Form 1040-X)".

Questions

So there's no tax on tips now?

Not entirely. Qualified tips, up to $25,000, can be deducted from the income you pay income tax on. They are still wages, Social Security and Medicare tax still apply, and tips that don't qualify are reported and taxed as before.

Can I deduct all of my overtime pay?

No. Only the premium the Fair Labor Standards Act requires, usually the "half" of "time-and-a-half". If your pay stub shows the total overtime paid at time-and-a-half, the deductible part is one-third of that total.

I have an ITIN. Can I claim the tips or overtime deduction?

No. The IRS requires a Social Security number valid for employment for both deductions. With an ITIN you can still report your tips and wages, get your refund and claim the credits that don't require a Social Security number.

I'm married and file separately. Can I claim it?

No. If you're married, the IRS requires a joint return to claim the tips deduction or the overtime deduction.

Do I have to itemize to claim it?

No. Both deductions are available whether you take the standard deduction or itemize, and they come off on top of the deduction you choose.

My 2025 W-2 doesn't show my qualified overtime. What do I do?

Check box 14 and whether your employer gave you a separate statement. If not, the IRS lets you figure it from your pay stubs: the premium if it's shown separately, or one-third of the total overtime paid at time-and-a-half. Keep those pay stubs with your tax records.

I'm self-employed and get tips through an app. Can I deduct them?

Possibly, if your occupation is on the IRS list and you aren't in a specified service trade or business. The deduction can't be more than that business's net income, and you should keep a record of each tip. In this case, talk to a tax expert before claiming it.

Sources

This guide is general information. Your situation may differ; the IRS's instructions are the final word.

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