How to Claim Tax Deductions for Qualified Tips and Overtime

To claim the new federal tax deductions for qualified tips and qualified overtime, you calculate each amount from your pay records, enter them on the new Schedule 1-A, and attach it to your Form 1040. The total from Schedule 1-A flows to line 13b of the 1040.¹ Both deductions were created by the One, Big, Beautiful Bill Act, apply to tax years 2025 through 2028, and are available whether you itemize or take the standard deduction.² The annual caps are $25,000 for qualified tips and $12,500 for qualified overtime ($25,000 on a joint return). Married taxpayers must file jointly, and you need a valid Social Security number.

Which Tips Actually Qualify

Under Internal Revenue Code Section 224, qualified tips are cash tips received in an occupation that customarily and regularly received tips before January 1, 2025.³ The IRS has published the full list of qualifying occupations, and it runs broader than food service alone: bartenders and wait staff, but also rideshare drivers, tattoo artists, home plumbers, tutors, pet caretakers, and digital content creators are among the roles covered.⁴ Check the list against your specific job before you claim.

The payment itself also has to be a real tip. That means the customer paid voluntarily, set the amount without negotiation, and was not required to leave it by employer policy.⁵ Mandatory service charges, including automatic gratuities added to large-party bills, are treated as wages and do not qualify. Tips received in a “specified service trade or business” — the category that covers fields like law, accounting, consulting, and financial services — are also excluded, so professionals in those fields cannot reclassify fees as tips.

Which Overtime Actually Qualifies

Internal Revenue Code Section 225 defines qualified overtime as the pay above your regular hourly rate for overtime hours that your employer is required to pay under Section 7 of the Fair Labor Standards Act.⁶ Only the premium portion counts. If you earn $20 an hour and get $30 for an overtime hour, only the $10 half-time premium is deductible, not the full $30.

The FLSA piece is the eligibility gate most workers miss. Your overtime must be required under the FLSA, which means you have to be both covered by the statute and non-exempt from its overtime provisions.⁷ Many salaried workers in executive, administrative, or professional roles are exempt. Overtime paid voluntarily by an employer, or paid only because a state law requires it, does not qualify. If you are not sure where you stand, ask your employer how you are classified or review the Department of Labor’s exemption criteria.⁸

Filling Out Schedule 1-A

Schedule 1-A is the new form that carries both deductions. Part II covers qualified tips and Part III covers qualified overtime. The combined total moves to line 13b of Form 1040.¹

For the tips deduction, the source figures come from box 7 of your W-2 (Social Security tips), any Form 4137 you filed for unreported tip income, and any 1099 forms showing tip amounts. For the overtime deduction, the number starts from box 1 of your W-2 (total wages) or from a 1099-NEC or 1099-MISC.

For tax year 2025, employers were not required to break out qualified tips or qualified overtime separately on W-2s or 1099s, so you may have to calculate the amounts yourself using the Schedule 1-A instructions.⁹ If your W-2 does not show the overtime premium as a distinct line, the instructions walk you through working back to it from your pay stubs and hour records. Starting with tax year 2026, Forms W-2, 1099-NEC, 1099-MISC, and 1099-K will report qualified tips and qualified overtime separately, which will make later filings simpler.³

Income Limits That Shrink the Deduction

Both deductions phase out once your modified adjusted gross income exceeds $150,000, or $300,000 on a joint return. You lose $100 of deduction for every $1,000 above the threshold.⁶ A single filer with the full $12,500 overtime deduction sees it disappear at $275,000 of modified AGI. A single filer with the full $25,000 tips deduction sees it disappear at $400,000.

Modified AGI for this purpose is your regular AGI plus any amounts excluded under the foreign earned income exclusion or the exclusions for income from Guam, American Samoa, or Puerto Rico. For most domestic workers, AGI and modified AGI are the same number.

What These Deductions Do Not Cover

The tips and overtime deductions reduce federal income tax only. Social Security tax (6.2%) and Medicare tax (1.45%) still apply to every dollar of tips and every dollar of overtime.¹⁰ Your employer keeps withholding those payroll taxes, and claiming the deduction on your return does not refund any FICA already withheld. The overtime deduction expires for tax years beginning after December 31, 2028, and the tips deduction runs on the same 2025-through-2028 window.

Some states have enacted their own overtime or tip exclusions, but those operate separately from the federal deduction and do not carry over to your Form 1040. Check your state’s revenue department for its own rules.

Keep Your Tip Records

Whether or not you claim the deduction, federal law requires you to keep a daily record of all tips you receive. IRS Form 4070A, in Publication 1244, is the standard daily log, capturing the date, your employer’s name, and cash tips, credit card tips, and tip-sharing amounts, along with the date and value of any noncash tips such as tickets or passes.¹¹ An electronic system from your employer works too, as long as it captures the same information.

By the 10th of each month, you must report the prior month’s tips to your employer if they total $20 or more, generally on Form 4070 or an equivalent statement.¹² Those numbers feed the W-2 boxes and Form 4137 amounts you will pull onto Schedule 1-A, so accurate records now save reconstruction work at filing time. If you must report allocated tips shown in box 8 of your W-2, you use Form 4137 to figure the Social Security and Medicare tax on them.¹³

1
Internal Revenue Service. 2025 Schedule 1-A (Form 1040)
2
Internal Revenue Service. One, Big, Beautiful Bill: How to Take Advantage of No Tax on Tips and Overtime
3
Internal Revenue Service. Notice 2025-69 – Guidance for Individual Taxpayers Who Received Qualified Tips or Overtime
4
Internal Revenue Service. Occupations That Customarily and Regularly Received Tips on or Before Dec. 31, 2024
5
Internal Revenue Service. Interim Guidance on Rev. Rul. 2012-18
6
Office of the Law Revision Counsel. 26 USC 225 – Qualified Overtime Compensation
7
Internal Revenue Service. Questions and Answers About the New Deduction for Qualified Overtime Compensation
8
U.S. Department of Labor. Overtime Pay
9
Internal Revenue Service. What to Know About the No Tax on Overtime Deduction
10
Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
11
Internal Revenue Service. Tip Recordkeeping and Reporting
12
Office of the Law Revision Counsel. 26 U.S. Code 6053 – Reporting of Tips
13
Internal Revenue Service. Form 4137 – Social Security and Medicare Tax on Unreported Tip Income