TL;DR
- ✅ Tips: deduct up to $25,000 from federal income tax. Social Security and Medicare still apply
- ✅ Overtime: deduct only the extra half of time-and-a-half, up to $12,500 ($25,000 joint)
- ✅ Both phase out above $150,000 of income ($300,000 joint)
- ✅ On the W-4: Deductions Worksheet lines 1a (tips) and 1b (overtime), then Step 4(b)
What the deductions actually do
These are deductions, not exclusions from your paycheck. They reduce your federal taxable income, which cuts income tax. They do not remove tips or overtime from the pay your employer reports, and they do not touch FICA. So a $20 tip still has about $1.53 of Social Security and Medicare taken out. They also apply to federal tax only; your state may tax the same income.
Tips
Up to $25,000 a year of voluntary tips in an occupation that customarily receives tips. Phases out as income rises above $150,000 ($300,000 joint).
Overtime
Only the premium half of time-and-a-half pay, up to $12,500 a year ($25,000 if married filing jointly). Same income phase-out.
Still taxed
Social Security and Medicare on all tips and overtime, plus any state income tax that does not follow the federal rules.
A worked example
A single server earns $20,000 in wages and $15,000 in reported tips, $35,000 in total. Without the tip deduction, taxable income after the $16,100 standard deduction is $18,900, and federal tax is about $2,020. With the tip deduction, taxable income falls to $3,900 and tax is about $390. That is roughly $1,630 less tax for the year, and the W-4 is how you collect it a little at a time instead of waiting for a refund. These are rounded estimates from the 2026 brackets; your numbers will differ.
See your withholding with the tip and overtime deductions — free
The calculator has an OBBBA section between Steps 3 and 4. Enter your tips and overtime to see the change.
Open the W-4 Calculator →Where it goes on the W-4
1. Get the Deductions Worksheet
It is part of the 2026 Form W-4, available on the IRS site.
2. Line 1a: tips
Enter your estimated qualified tips for the year, up to $25,000.
3. Line 1b: overtime
Enter only the premium part of your overtime, up to the cap.
4. Finish the worksheet
Add any other deductions it asks about.
5. Enter the total in Step 4(b)
Then submit the form to your employer.
⚠️ Do not overestimate
Tips and overtime vary week to week. If you enter $25,000 of tips and earn $8,000, you will under-withhold and owe. Base the number on a conservative estimate, or on last year’s total. See how to stop owing taxes if you already over-claimed.
Could you owe nothing at all?
A part-time tipped worker with a low income may end up with no federal tax after the standard deduction and tip deduction. If you owed nothing last year and expect to owe nothing this year, you may be able to claim exempt. Read W-4 exempt: who can claim it before doing that, because FICA is still withheld and exempt must be renewed each February.
Tips, overtime and the rest of the 2025 tax law
The same law added a senior deduction and a deduction for car loan interest, and it raised the child tax credit to $2,200. All of them go through the same worksheet. Our overview of how the 2025 tax law changes your 2026 W-4 covers each one, and W-4 Step 4 explained shows how 4(a), 4(b) and 4(c) work together.
Frequently asked questions
Are tips really tax-free in 2026?
No. Qualified tips are deductible from federal income tax up to $25,000 a year, but you still owe Social Security and Medicare tax on them, and state tax may still apply. The deduction also phases out at higher incomes.
How do I claim the tip deduction on my W-4?
Use the Deductions Worksheet that comes with the 2026 W-4 and enter your estimated qualified tips on line 1a. Put the worksheet total in Step 4(b). It lowers the federal income tax withheld from each paycheck.
How is the overtime deduction different?
It covers only the extra half of time-and-a-half pay, not your whole overtime paycheck, up to $12,500 a year ($25,000 if married filing jointly). Enter it on line 1b of the Deductions Worksheet.
Do I have to change my W-4 to get the deduction?
No. You can wait and claim it when you file your 2026 return. Changing the W-4 just gets the money into your paychecks during the year instead of as a refund.
What if I get cash tips my employer does not know about?
Tips must be reported to qualify. Cash tips you report to your employer (or on your return) can count, but unreported tips do not qualify. Keep a daily tip log.
Who qualifies as a tipped worker?
The tips must be voluntary and you must work in an occupation that customarily receives tips, such as servers, bartenders, delivery drivers, hair stylists and hotel staff. The IRS publishes a list of qualifying occupations.
Key terms in this article
Related guides
How the 2025 Tax Law (OBBBA) Changes Your 2026 W-4 Withholding
The One Big Beautiful Bill Act (signed 2025) added deductions for tips, overtime, seniors and car loan interest. Here is where each goes on your 2026 W-4.
W-4 Step 4 Explained: Other Income, Deductions, and Extra Withholding (2026)
Step 4 is how you fine-tune for side income, itemized deductions, and extra withholding. Most people skip it — here's when you shouldn't.
W-4 Exempt from Withholding: Who Qualifies and How to Claim It (2026)
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How to Stop Owing Taxes at Tax Time: Fix Your W-4 (2026)
Owe the IRS every April? Why withholding falls short and which W-4 lines close the gap on your next paycheck.
No Tax on Tips, Overtime, Seniors and Car Loans: 2026 W-4 Cheat Sheet
All four new deductions side by side: caps, income limits, phase-outs, and the Deductions Worksheet line for each.
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