IRS No Tax on Tips and Overtime Rules: 2025–2028 Guidance and Examples

No Tax on Tips Deduction

The No Tax on Tips deduction allows eligible taxpayers to deduct up to $25,000 of qualified tips from federal taxable income. The deduction is available regardless of whether the taxpayer itemizes deductions or takes the standard deduction.

The deduction phases out when modified adjusted gross income exceeds $150,000 for single filers or $300,000 for married taxpayers filing jointly.

What Are Qualified Tips?

Under IRS final regulations, qualified tips must meet all of the following requirements:

• The tips must be received in an occupation included on the IRS/Treasury List of Occupations that Receive Tips.
• The tips must be paid voluntarily by the customer.
• The amount must not be subject to negotiation.
• The customer must determine the amount.
• The tips must be received directly from customers or through a mandatory or voluntary tip-sharing arrangement.

Qualified tips are generally “cash tips,” which include cash and cash-equivalent forms such as credit cards, debit cards, checks, gift cards, and electronic or mobile payments.

Service Charges and Automatic Gratuities

Mandatory service charges and automatic gratuities are not qualified tips. If a customer cannot modify or remove the charge, it is treated as a service charge rather than a tip.

If the customer has the option to modify or disregard the amount, it may qualify as a tip if all other requirements are met.

Tip-Sharing Arrangements

Qualified tips may include amounts received through mandatory or voluntary tip-sharing arrangements. Workers who do not receive tips directly from customers may still qualify if they receive tips through an eligible arrangement and work in a listed tipped occupation.

Amounts received by a manager or supervisor through a tip pool are not qualified tips. However, direct tips received by a manager or supervisor for services personally performed may qualify if all requirements are met.

Occupations That Qualify for No Tax on Tips

The final regulations include more than 70 occupations that customarily and regularly receive tips. The list is organized using Treasury Tipped Occupation Codes (TTOC).

The occupations are grouped into the following categories:

• Food and beverage service
• Entertainment and events
• Hospitality and guest services
• Home services
• Personal services
• Personal appearance and wellness
• Recreation and instruction
• Transportation and delivery

Only tips received in occupations included on the official IRS/Treasury list qualify for the deduction.

Examples of No Tax on Tips

The following examples distinguish between IRS examples and illustrative examples based on IRS final regulations. Illustrative examples are not official IRS examples and are provided only to explain how the rules may apply.

IRS Example: Mandatory Service Charge

A restaurant adds a mandatory service charge to a customer’s bill. If the customer cannot modify, reduce, or remove the charge, the amount is not a qualified tip because it is not paid voluntarily by the customer.

Illustrative Example: Restaurant Server

A restaurant server receives voluntary tips from customers in cash and by credit card. If the server’s occupation is included on the IRS/Treasury list and all other requirements are met, the tips may qualify for the No Tax on Tips deduction.

Illustrative Example: Tip Pool

A bartender receives tips through a mandatory or voluntary tip-sharing arrangement. If the bartender works in a listed occupation and the tips otherwise meet the requirements, the amounts may qualify.

Illustrative Example: Delivery Worker

A delivery worker receives voluntary tips through a mobile payment platform. If the occupation is included on the IRS/Treasury list and reporting requirements are satisfied, the tips may qualify for the deduction.

No Tax on Overtime Deduction

The No Tax on Overtime deduction allows taxpayers to deduct qualified overtime compensation from federal taxable income. The deduction applies only to the overtime premium required under the Fair Labor Standards Act.

The maximum deduction is:

• $12,500 for single filers
• $25,000 for married taxpayers filing jointly

The deduction phases out at the same income thresholds as the tips deduction.

Example of No Tax on Overtime

An employee earns $20 per hour and works 45 hours in a week. The overtime rate is $30 per hour. The deductible portion is the $10 overtime premium per hour, not the full overtime pay.

Filing Requirements

Taxpayers claiming the No Tax on Tips deduction must include the Social Security number of the individual who received the tips. Married taxpayers must file jointly to claim the deduction.

Employers and other payers must report tip income on Forms W-2, 1099-NEC, 1099-MISC, or 1099-K, as applicable.

Important Limitations

• The deductions apply only for federal income tax purposes.
• Social Security and Medicare taxes still apply.
• State tax treatment may differ.
• The provisions apply only for tax years 2025 through 2028.
• Only qualified tips from listed occupations are eligible.

Official IRS and Treasury Sources

• IRS News Release
• Internal Revenue Bulletin 2026-18
• IRS Occupations List

These examples are based on IRS final regulations and are provided for illustrative purposes. Taxpayers should consult a qualified tax professional for advice specific to their situation.