Tips and overtime are still taxed at federal, state, and local levels.
Only the extra “half” of overtime pay is deductible—even for double or triple time.
This deduction is temporary and ends in 2028.
*The Fine Print.
Starting in 2025, employees can deduct up to $25,000 in qualified tips from their taxable income when filing their federal tax return. This deduction does not change your paycheck during the year — it only reduces the income you’re taxed on at filing time. Tips will still have Social Security, Medicare, state income, and local income taxes withheld.
For overtime, only the extra pay portion of your overtime rate — the “half” in “time-and-a-half” — is eligible for deduction, even if you earn double or triple time for certain shifts. The law only allows deduction of this “half” portion.
The deduction phases out for individuals earning more than $150,000 (single) or $300,000 (joint), and it does not apply to married individuals who file separately. Employees can deduct up to $12,500 (single) or $25,000 (joint) of qualifying overtime pay from their taxable income when filing their federal tax return.
The Treasury Department and IRS will release the full list of eligible occupations by October 2, 2025, so it’s not yet clear exactly which workers will qualify. Currently, the law allows the deduction only on “qualified tips.” These are tips given to workers in occupations that “customarily and regularly receive tips.”
