IRS Working Families Tax Cuts: “No tax on tips” and “No tax on overtime”
IRS guidance updated July 1 and July 6 explains the ‘no tax on tips’ and ‘no tax on overtime’ deductions—and what to track in your pay records.
IRS updated Working Families Tax Cuts guidance—here are the tips-and-overtime parts for household budgets
The IRS says its Working Families Tax Cuts – Individuals and workers page was last reviewed or updated on July 1, 2026, and its main Working Families Tax Cuts landing page was last reviewed or updated on July 6, 2026. Among the most household-relevant changes are two deductions that can affect what tipped workers and overtime earners owe in federal income taxes: “no tax on tips” and “no tax on overtime.”
The IRS also warns that common pay documents (like W-2s and 1099s) may not separately spell out the qualified tip or overtime amounts you need—so recordkeeping and correct entries on your return matter for household budgeting, not just tax prep.
1) “No tax on tips”: limits, income phaseout, and who doesn’t qualify
For tax years 2025 through 2028, IRS guidance says eligible employees and self-employed individuals may deduct qualified tips they received in occupations the IRS identified as “customarily and regularly receiving tips” (identified on or before Dec. 31, 2024). The IRS defines “qualified tips” as voluntary cash or charged tips received from customers, including shared tips. The maximum annual deduction is $25,000.
For higher-income filers, the deduction phases out for modified adjusted gross income above $150,000 (or above $300,000 for married couples filing jointly). If you’re self-employed, the IRS also says the deduction can’t exceed your net income (before this deduction) from the trade or business where the tips were earned.
IRS guidance also sets a bright-line disqualifier for many workers: individuals who are self-employed in a Specified Service Trade or Business (SSTB) under Section 199A, or employees of an employer in an SSTB, do not qualify for the “no tax on tips” deduction.
2) “No tax on overtime”: how the math works and what’s capped
For tax years 2025 through 2028, IRS guidance says the “no tax on overtime” deduction applies to the portion of qualified overtime pay that exceeds your regular rate of pay—an example given is the “half” portion of “time-and-a-half.” Overtime must be reported on Form W-2, Form 1099, another statement furnished to you, or directly by you.
Like the tips deduction, the overtime deduction has both a cap and an income phaseout. The maximum annual deduction is $12,500 (or $25,000 for joint filers). It phases out for modified adjusted gross income above $150,000 (or $300,000 for joint filers).
To claim either deduction, IRS guidance says you need a Social Security number (SSN) and that you may claim the deduction whether you itemize or not. If you’re married, the IRS guidance says to file jointly to claim.
Don’t wait for your W-2 or 1099 to “label” your benefit
From a household-budget perspective, one of the most practical IRS points is that your tax forms may not tell the full story at a glance. For the 2025 tax year, IRS guidance warns that W-2s and 1099s may not separately identify the specific amounts you need—so your paperwork has to be more complete than what shows up in the “box” totals.
Still, the IRS says the tip or overtime amount you claim must be included in the total amounts reported on those forms—so it’s not enough to “trust the box that’s filled in.”
Instead, the IRS checklist emphasizes keeping records like:
- Daily or weekly tip logs, plus employer reports, point-of-sale summaries, or invoices showing tips
- Pay stubs or payroll summaries showing overtime pay
If you worked multiple jobs, switched employers, or worked as an independent contractor, the IRS guidance says you may need records from each employer or client/customer.
Where it shows up on your return: Schedule 1-A parts II and III
At filing time, IRS guidance directs taxpayers to claim the tips deduction on Schedule 1-A, Part II (“No Tax on Tips”) and the overtime deduction on Schedule 1-A, Part III (“No Tax on Overtime”). The IRS also points back to basic claim steps like including your SSN on the return and following the joint-filing instruction where applicable.
For gig and self-employed tipped work, IRS guidance additionally notes that qualified tips may show up across information returns such as W-2 forms and 1099-MISC and 1099-NEC records—and possibly a 2026 Form 1099-K in connection with 2025 activity. But the IRS emphasizes that forms may not separately report qualified tip amounts for 2025, so your own records still matter.
What to watch next for the 2025 tax year
IRS guidance references final regulations listing occupations where workers customarily and regularly receive tips. It also says Treasury and the IRS will provide penalty relief for tax year 2025 tip reporting, and transition relief for tax year 2025 overtime reporting.
For household budgets, the best next step is practical: confirm which tax year you’re dealing with, then align your records and Schedule 1-A entries to the IRS’s definitions—especially since W-2s and 1099s may not separately spell out the qualified tip or overtime amounts for you.
Sources
Discover more from Interactive News
Subscribe to get the latest posts sent to your email.