No Tax on Overtime and Tips: What Changes on Your Paycheck

No tax on overtime does not mean overtime stops being taxed on your paycheck in 2026. The One Big Beautiful Bill Act created two federal deductions, one for qualified tips and one for qualified overtime, but you claim them on your tax return. Your employer keeps withholding federal income tax, Social Security and Medicare as before, unless you change your W-4. State tax usually still applies too.

The deductions run for tax years 2025 through 2028. This guide covers who qualifies, how much you can deduct, how to see the savings in your paycheck instead of waiting for a refund, and where bonuses fit in. The hourly paycheck calculator estimates the deduction and the tax it saves.

The two deductions at a glance

	Qualified tips	Qualified overtime
Yearly limit	$25,000 per return	$12,500, or $25,000 on a joint return
What counts	Voluntary cash and card tips in a job that customarily received tips by the end of 2024	Only the extra half of time and a half required by federal law
Phase-out starts	$150,000 of modified AGI, $300,000 joint	Same
Phase-out rate	$100 less for each $1,000 over	Same
Years	2025 through 2028	2025 through 2028
Social Security and Medicare	Still taxed	Still taxed

Both are deductions on Schedule 1-A of Form 1040. You can claim them whether you itemize or take the standard deduction. They lower taxable income, not adjusted gross income. Married couples must file jointly to claim either one.

Is overtime taxed in 2026?

Yes. Overtime pay is wages, so it goes through the same withholding as the rest of your check. What changed is that some of it can come back as a deduction when you file.

Only the premium counts. If you make $25 an hour, time and a half is $37.50, and the qualified part is the extra $12.50, not the full $37.50. The rules are tight:

• It has to be overtime required by section 7 of the Fair Labor Standards Act, generally hours over 40 in a workweek.
• Double time counts only up to the time-and-a-half amount the law requires.
• Daily overtime under a state law, union contract overtime and weekend or holiday premiums only count to the extent federal law would have required them.
• Employees exempt from overtime under federal law have no qualified overtime.

The IRS gives this example: a worker at $20 an hour works 50 hours and is paid double time for the 10 extra hours, $400. Federal law only required time and a half, so the qualified overtime is $100. The Department of Labor overtime page explains who is covered.

Overtime example with 2026 numbers

Take a single worker in Texas at $25 an hour, 40 regular hours plus 5 overtime hours every week, paid every two weeks.

Line	Per paycheck
Regular pay, 80 hours	$2,000.00
Overtime, 10 hours at $37.50	$375.00
Gross pay	$2,375.00
Social Security	$147.25
Medicare	$34.44
Federal withholding, plain W-4	$201.15

The overtime premium for the year is $12.50 x 5 hours x 52 weeks = $3,250. Deducting it saves an estimated $390 of federal income tax for the year, since this worker’s top bracket is 12%. Social Security and Medicare do not change.

Tips example

A single server in Texas earns $15 an hour for 35 hours a week, plus $300 of reported tips each two-week paycheck. Tips come to $7,800 for the year, all under the $25,000 cap. The deduction saves an estimated $912 of federal tax. Federal withholding with a plain W-4 is $78.15 a check, and the $300 of tips still has Social Security and Medicare taken out.

Tips only qualify if you report them to your employer, so they appear on your W-2, or report them on Form 4137. Automatic service charges added to a bill are not tips. The FAQ on whether tips are taxed and IRS Topic 761 cover tip reporting.

Getting the savings in each paycheck

Employers do not change withholding for these deductions on their own. The 2026 withholding tables in Publication 15-T treat tips and overtime like any other pay. If you want the savings now instead of as a refund, give your employer a new Form W-4.

The 2026 W-4 has a Deductions Worksheet for Step 4(b). Line 1a is your estimate of qualified tips, up to $25,000, and line 1b is the “and-a-half” part of your overtime, up to $12,500 ($25,000 married filing jointly). Both lines only apply if your total income is under $150,000 ($300,000 joint). That total goes into Step 4(b), which lowers the wages your employer taxes.

For the two examples above:

Worker	Federal withholding, plain W-4	With the deduction in Step 4(b)
$25/hour with 5 overtime hours a week	$201.15	$186.15
$15/hour plus $300 tips a check	$78.15	$43.08

Estimate on the low side. If your overtime or tips drop and you entered too much, you may owe at tax time. The W-4 guide covers the rest of the form.

What still comes out

The federal deduction does not touch:

• Social Security, 6.2% up to the 2026 wage base of $184,500. See the FICA guide.
• Medicare, 1.45%, plus 0.9% over $200,000.
• State income tax, unless your state passed its own break.
• Local income tax.

None of the states we checked changes regular paycheck withholding for tips or overtime in 2026. Where a state offers a break, you claim it on the state return.

State tax on tips and overtime

States are split. Based on state guidance reviewed for this site:

• Michigan, Iowa, Idaho, Montana and Oregon allow both tips and overtime. Michigan’s version starts in 2026.
• Georgia excludes up to $1,750 of cash tips and up to $1,750 of overtime for 2026 through 2028, through its own law.
• Alabama allows the federal overtime premium up to $1,000 for 2026 through 2028, but not tips.
• Hawaii adopted the tips deduction but not overtime, starting with 2026.
• Colorado lets the tips deduction flow through but adds overtime back for 2026.
• Kentucky and South Carolina have decoupled from both, and California has not adopted them.

Other states have acted or are considering it, and this changes as legislatures meet. Check your state’s revenue department, or your state’s page from the states list, before counting on a state break.

Are bonuses taxed under the Big Beautiful Bill?

Yes, the same way as before. The law did not create a deduction for bonuses. It made the individual tax rates permanent, so the federal flat rate on supplemental wages stays at 22%, or 37% on supplemental pay over $1 million in a year.

A $5,000 bonus paid on its own check in Texas, using the flat method, has $1,100 of federal tax, $310 of Social Security and $72.50 of Medicare withheld, leaving $3,517.50. The bonus tax calculator works it out for any state, and the FAQs on whether bonuses are taxed differently and whether overtime is taxed have short answers.

The IRS explains both deductions on its pages for no tax on tips and no tax on overtime. The methodology page shows how the calculator estimates the deduction, and the main paycheck calculator includes a tips field for any state.