The new federal deductions for qualified tips and qualified overtime pay are claimed on your tax return, not applied to each paycheck. So the "no tax on overtime" and "no tax on tips" rules generally won't change the federal withholding on your pay stub. They can lower your income tax when you file, which may mean a bigger refund or a smaller balance due.
Both deductions came from federal tax legislation passed in 2025, alongside new deductions for seniors and some car-loan interest. This guide explains what changed, what didn't, and how it shows up in a real paycheck.
What the new deductions are
The 2025 law created several new deductions that lower federal taxable income:
- Qualified tips: for workers in jobs where tips are customarily received.
- Qualified overtime pay: for overtime compensation required under the federal Fair Labor Standards Act.
- Seniors: an added deduction for older taxpayers.
- Car-loan interest: for interest on certain qualifying vehicle loans.
Each deduction has eligibility rules, dollar limits and income-based phase-outs, and the tips and overtime deductions are temporary, written for tax years 2025 through 2028. The rules are detailed, so check the IRS page on the new provisions, linked in the sources below, for the current limits and who qualifies.
One point matters for overtime workers in particular: the overtime deduction is aimed at the extra premium the FLSA requires, the "half" in time-and-a-half, rather than your whole overtime paycheck. The IRS guidance explains how to figure the qualifying amount.
What "no tax on overtime" doesn't mean
The nickname suggests overtime is now tax-free. In practice:
- Social Security and Medicare still apply. Tips and overtime remain wages, so 6.2% Social Security (up to the $184,500 wage base) and 1.45% Medicare are withheld from them as before.
- Federal income tax withholding generally continues. Your employer still withholds on overtime and reported tips using the normal payroll formulas.
- State income tax may still apply. States decide for themselves whether to follow federal deductions. Check your state tax agency.
- It's a deduction, not an exclusion. You claim it when you file, and it reduces taxable income. The benefit depends on your tax bracket.
Worked example: overtime in Nevada
Take a single, non-exempt warehouse worker in Nevada earning $22 an hour, paid weekly. Nevada has no state income tax. Under the FLSA, hours over 40 in a workweek are paid at least 1.5 times the regular rate, so overtime here pays $33 an hour.
Using the PaycheckHubs paycheck calculator, here is a regular 40-hour week compared with a 45-hour week (40 regular hours plus 5 overtime hours, equal to 47.5 hours of straight-time pay):
| Weekly paycheck | 40 hours | 45 hours | Difference |
|---|---|---|---|
| Gross pay | $880.00 | $1,045.00 | $165.00 |
| Federal income tax | $63.68 | $83.48 | $19.80 |
| Social Security | $54.56 | $64.79 | $10.23 |
| Medicare | $12.76 | $15.15 | $2.39 |
| Net pay | $749.00 | $881.58 | $132.58 |
The $165 of overtime pay is withheld on like any other wages. Of that $165, the FLSA premium part is the extra $11 an hour above the regular rate, or $55 for the week. That premium portion is the kind of amount the new overtime deduction looks at, subject to the IRS rules and limits.
The deduction shows up on the tax return. For a worker whose taxable income sits in the 12% federal bracket, each $100 of qualifying deduction lowers federal income tax by about $12. These are estimates; your own result depends on your total income, filing status and eligibility.
How tips fit in
Tips you report to your employer are wages. Your employer includes them in payroll, withholds federal income tax, Social Security and Medicare on them, and reports them on your Form W-2. Cash tips you receive should still be reported to your employer under the normal rules.
The new deduction doesn't change those reporting or withholding rules. It lowers taxable income on your return for qualified tips, within the limits set by law. Keep good records of tips received, since they support both your W-2 and any deduction you claim.
Getting the benefit in your paycheck instead
Because the deductions are claimed at filing, your standard withholding generally doesn't account for them. If you want your paychecks to reflect an expected deduction, the W-4 has a place for it: Step 4(b) lets you report deductions beyond the standard deduction, which lowers withholding.
Be careful with this. If you overestimate the deduction, you could end up owing at filing. The IRS Tax Withholding Estimator can help you size the adjustment, and our guide on how to fill out a W-4 walks through Step 4(b).
Who benefits most
Workers who regularly earn reported tips, or who work a lot of FLSA overtime, will see the largest effect, within the deduction limits. Salaried employees classified as exempt under the FLSA aren't owed federal overtime, so the overtime deduction generally won't apply to them. Our explainer on how overtime pay is calculated covers who is non-exempt and how the regular rate works.
State treatment varies widely. In no-wage-tax states such as Nevada and Florida, there's no state income tax on tips or overtime to begin with. Elsewhere, check whether your state follows the federal deductions. For a broader look at this year's updates, see what changed for paychecks in 2026.
Frequently Asked Questions
Is overtime tax-free now?
No. Overtime is still subject to Social Security, Medicare and income tax withholding. The new deduction can lower federal income tax on qualified overtime when you file your return.
Will my paycheck go up because of no tax on overtime?
Generally no, because standard withholding doesn't apply the deduction. You see the benefit at filing, unless you adjust your W-4.
Do the tips and overtime deductions affect state taxes?
It depends on the state. Some states follow federal deductions and some don't, so check with your state tax agency.
How long do these deductions last?
The tips and overtime deductions are temporary and cover tax years 2025 through 2028 under current law. Check the IRS for any updates.
Sources
- IRS: One Big Beautiful Bill provisions
- U.S. Department of Labor: Overtime Pay
- About Form W-4
- IRS Publication 15, Employer's Tax Guide
Run the numbers for your state
Written and checked against IRS, Social Security Administration and state tax agency publications for the 2026 tax year. General information, not tax, legal or financial advice. Read our editorial policy, calculation methodology and sources.