Tips and overtime: the new deductions, explained

Summary

Above that income, the deduction drops $100 for each $1,000. You can claim it whether you take the standard deduction or itemize, and it's claimed on Schedule 1-A of Form 1040. It's a deduction: it lowers the income you pay federal income tax on, but the money still shows up on your W-2. Your state's rules may be different.

Which tips count

• Tips the customer gives voluntarily, in cash or by card or check, in an amount the customer decides without negotiating. Tips you receive through tip sharing count too.
• Only in occupations on the official Treasury and IRS list of jobs that customarily received tips before 2025. It has more than 70 occupations, including wait staff, bartenders, cooks, dishwashers, hotel and home cleaners, barbers and hairstylists, manicurists, taxi and rideshare drivers, and delivery workers.
• They have to be reported: on your W-2, on a 1099, or on Form 4137 if you didn't report them to your employer.

Mandatory service charges added to the bill don't count, unless the customer can remove or change them. General construction isn't on the list; some home-service trades are, such as home repair and maintenance, landscaping, plumbing and cleaning.

If you're self-employed in a listed occupation, you can claim it too, but the deduction can't be more than your net profit from that business.

Which overtime counts

Only the extra part required by the federal labor law (FLSA) for hours over 40 in a week counts: the "half" in time-and-a-half. For example, if you earn $20 an hour and get $30 for each overtime hour, $10 of each overtime hour counts, not the full $30.

• Overtime required only by a state law (for example, for working more than 8 hours in a day) or by a union contract, beyond what federal law requires, doesn't count.
• If you're paid double time, only the part federal law requires counts.
• If your job is exempt from overtime under federal law, that pay doesn't qualify.

Where to find your numbers: 2025 returns

For 2025, employers didn't have to report these amounts separately. The IRS lets you figure them like this:

• Employee tips: the "social security tips" in box 7 of your W-2, or the tips you reported to your employer (Form 4070), or box 14 if your employer put them there. You can add the amount on line 4 of Form 4137.
• Overtime: box 14 of your W-2 if your employer used it, or your pay stubs. If your pay stub shows the total paid for overtime at time-and-a-half, use one-third of that total; if you were paid double time, one-quarter.
• Keep the documents you used to figure them.

Starting with 2026 returns

The 2026 W-2 will have new codes in box 12: "TP" for cash tips reported to the employer and "TT" for qualified overtime. Box 14b will show your tipped occupation code.

For overtime, starting in 2026 you can only deduct what your employer reports. If it's missing or wrong, ask for a corrected W-2 (W-2c); the IRS doesn't accept Form 4852 for this.

Social Security numbers and ITINs

Both deductions require a Social Security number valid for employment, issued by the return's due date (including extensions). An ITIN isn't a Social Security number, so they can't be claimed with an ITIN. If you're married, you must file jointly, and the tips or overtime that count are those received by the spouse with a valid Social Security number.

To see it in your paycheck

Your employer won't change your withholding on its own. If you want less withheld during the year because of these deductions, give your employer a new W-4: the 2026 form has lines for tips and overtime on the Step 4(b) Deductions Worksheet. You can also use the IRS Tax Withholding Estimator. Don't enter deductions you won't be able to claim, or you'll end up owing when you file.

Schedule 1-A also has two other new deductions for 2025 to 2028: one for interest on loans for new cars and one of up to $6,000 for people 65 and older.