No Tax on Overtime and Tips: How to Find Them on Your Pay Stub
The new deductions can cut your federal tax bill, but only if you can pull the right numbers off your pay stub and read the new W-2 codes. Here's where to look, what codes TT and TP mean, and a calculator to size it up.
Estimate your deduction→Quick answer
The deductible part of overtime is the premium only, the extra half of time-and-a-half pay, not your full overtime total. If your pay stub lists an overtime premium, use that figure. If it only shows a combined overtime total paid at time-and-a-half, divide it by 3. On 2026 W-2s, this amount shows up as Box 12 code TT, and qualified tips show up as code TP. You'll claim both on Schedule 1-A with your Form 1040.
What the deductions are
Two new deductions arrived with the One Big Beautiful Bill Act, signed into law on July 4, 2025. One lets eligible workers deduct qualified overtime pay. The other lets eligible workers deduct qualified tips. Both apply to tax years 2025 through 2028, and both can lower what you owe when you file.
There's a catch that trips up a lot of people. For the 2025 tax year, employers weren't required to break these amounts out on your W-2. That means the source document you'll often need is your pay stub, and our guide to how to read a pay stub walks through every line. Reading it correctly is the difference between claiming the full deduction and leaving money behind.
What counts as qualified overtime
This is where most of the confusion starts. Overtime under the Fair Labor Standards Act is usually paid at time-and-a-half, so an hour of overtime for a $30 worker pays $45. Only the extra $15, the premium half, is deductible. Your regular rate for those hours isn't.
A few things decide whether your overtime qualifies. You have to be a non-exempt employee covered by FLSA overtime rules, which in practice means an hourly worker who earns time-and-a-half after 40 hours in a week. Salaried exempt staff generally don't qualify, and neither does overtime that falls outside federal FLSA rules, such as certain state-only or contract overtime.
One wrinkle worth knowing: if you received a non-discretionary bonus (an attendance, production, or longevity bonus that was promised in advance), it raises your regular rate, which in turn raises the premium you can deduct. A purely discretionary bonus doesn't count toward the regular rate.
How to find qualified overtime on your pay stub
Grab your final pay stub of the year, since the year-to-date column already totals your overtime for you. Then work through it in order.
First, confirm you're FLSA-covered. If you're hourly and get time-and-a-half past 40 hours, you're almost certainly in. Next, find the line labeled overtime or OT and read the year-to-date figure. Now check whether your employer already separated the premium. Some stubs list an overtime premium on its own line, and if yours does, that's your qualified overtime, no math required.
When the premium isn't broken out, you'll estimate it from the total using the method that matches your pay rate. These are the reasonable methods the IRS has described for workers in exactly this spot.
| What your pay stub shows | How to get the deductible premium |
|---|---|
| An "overtime premium" listed on its own line | Use that amount directly. It's already the deductible portion. |
| A combined overtime total paid at time-and-a-half (1.5x) | Divide the total by 3. Example: $9,000 ÷ 3 = $3,000 premium. |
| A combined overtime total paid at double-time (2x) | Divide the total by 4. Example: $20,000 ÷ 4 = $5,000 premium. |
Keep the pay stubs you relied on with the rest of your tax records. If your calculated premium would understate what you actually earned, say because a non-discretionary bonus lifted your regular rate, you're allowed to adjust the method to reflect that.
Worked example: a nurse claiming the overtime deduction
Maria is an hourly nurse who earns $30 an hour and is covered by FLSA overtime. Her final 2025 pay stub shows a year-to-date overtime line of $9,000, all paid at time-and-a-half. The stub doesn't separate the premium, so she divides the total by 3.
Maria is single with a modified adjusted gross income of $65,000, comfortably under the phase-out threshold, so the full $3,000 is deductible. In the 22% bracket, that trims roughly $660 off her federal income tax. Social Security and Medicare still applied to the overtime during the year, and her state may still tax it, but her federal taxable income drops by $3,000.
Overtime deduction calculator
Enter what your pay stub shows and this estimates your qualified overtime premium, your deduction after the caps and phase-out, and a rough federal tax saving. It's an estimate, not tax advice.
Enter your year-to-date total overtime pay.
Roughly your total income. Used to check the phase-out.
The top rate your income falls in. Used only for the estimated saving.
Estimate only. Social Security and Medicare still apply to your overtime, and your state may too. Confirm your figure against the Schedule 1-A instructions before filing.
What counts as qualified tips
The tips deduction works on a similar idea but a different number. Qualified tips are voluntary amounts a customer chooses to leave, whether in cash, on a card, or through a tip pool. A mandatory service charge, like an automatic 20% added to a large party, isn't a tip and doesn't count.
Your occupation matters too. The deduction is aimed at jobs that customarily and regularly receive tips, such as roles in food service and personal care. If your stub or year-end statement reports a qualified tip total, that's your starting figure. If it doesn't, your own records, tip logs, and the Social Security tips reported in Box 7 of your W-2 help you substantiate the amount.
The new 2026 W-2 codes: TT and TP
Here's the part that makes this a moving target, and the reason a lot of workers will be searching in January 2027. For tax year 2025, none of this was broken out on the W-2, which is why pay stubs carried the weight. Starting with tax year 2026, employers have to report these amounts on the W-2 using new codes, so the forms you receive in early 2027 will look different from anything you've seen before.
- Box 12, code TT reports your qualified overtime compensation, the deductible premium your employer has now calculated for you.
- Box 12, code TP reports your qualified tips for the year.
- Box 14b carries a tipped-occupation code that tells the IRS whether your role is eligible for the tips deduction. A code of "000" signals the role isn't eligible.
If you spot an unfamiliar TT or TP on a future W-2, that's the new reporting at work, not an error. Even then, the IRS advises checking the amount to make sure you're claiming the full benefit. And for any 2025 return you're still finishing, your pay stub remains the place to find these figures.
The 2026 Form W-4 also added a worksheet for workers who expect overtime or tips, so you can fine-tune your withholding during the year rather than waiting for the refund.
Deduction limits and income phase-outs
Neither deduction is unlimited, and both shrink at higher incomes. The overtime deduction caps at $12,500 for single filers and $25,000 for joint filers. The tips deduction caps at $25,000. Both use the same phase-out: it begins once your modified adjusted gross income passes $150,000 (single) or $300,000 (joint), and the allowed amount drops by $100 for every $1,000 you go over. For the overtime deduction, that means it reaches zero at $275,000 for single filers and $550,000 for joint filers.
Read this before you file
- It's a deduction, not an exemption. Federal income tax, Social Security, and Medicare are still withheld from your overtime and tips during the year. You claim the benefit at filing time.
- FICA still applies. Social Security (6.2%) and Medicare (1.45%) come out of overtime and tips in full. The deduction only reduces federal income tax.
- State tax may still apply. This is a federal deduction. Whether your state follows it depends on your state's own rules.
- Married filing separately doesn't qualify. If you're married, you'll need to file jointly to claim either deduction.
- You need a valid Social Security number to claim the overtime deduction.
How to claim the deductions
Both deductions land on the same form. Once you've figured your qualified overtime premium and your qualified tips, you report them on Schedule 1-A, which attaches to your Form 1040. Because they're above-the-line deductions, you can claim them whether you take the standard deduction or itemize. If you'd like the full walkthrough of the 1040 and the schedules that feed it, our 1040 forms hub covers each one, and our W-2 guide shows where codes TT and TP land at year-end.
Frequently asked questions
What does code TT mean on my W-2 or pay stub?
Starting with tax year 2026, employers report your qualified overtime premium in Box 12 of the W-2 using the new code TT. It shows the deductible half of your time-and-a-half pay. For tax year 2025 this code wasn't required, so many workers had to read the figure off their pay stubs instead.
What does code TP mean on my W-2 or pay stub?
Code TP in Box 12 reports your qualified tips for the year, the amount eligible for the No Tax on Tips deduction. It appears on 2026 W-2s alongside a tipped-occupation code in Box 14b that tells the IRS whether your job qualifies.
How do I find my overtime premium if my pay stub only shows a total?
If your pay was time-and-a-half, divide the year-to-date overtime total by 3 to get the deductible premium. If you were paid double-time, divide the total by 4. These are the reasonable methods the IRS describes for workers whose stubs don't separate the premium.
Does No Tax on Overtime mean nothing is withheld from my overtime pay?
No. It's a deduction you claim when you file, not an exemption from withholding. Your employer still withholds federal income tax, Social Security, and Medicare on overtime during the year. The deduction lowers your taxable income at filing time.
Can I claim both the tips deduction and the overtime deduction?
Yes. They're two separate deductions, each with its own cap and the same income phase-out. If you earned both qualified tips and qualified overtime, you can claim both on the same Schedule 1-A.
At what income does the overtime deduction phase out completely?
The deduction starts shrinking once your MAGI passes $150,000 (single) or $300,000 (joint), dropping $100 for every $1,000 over. It reaches zero at $275,000 for single filers and $550,000 for joint filers.
What if I'm self-employed?
The overtime deduction is for FLSA-covered W-2 employees, so self-employed workers don't qualify for it. The tips deduction can apply to self-employed people in eligible occupations, but it can't exceed your net income from the business where the tips were earned.
Sources
Need a pay stub that shows overtime clearly?
Generate a clean, itemized pay stub that separates your overtime premium, so claiming the deduction is simple when tax time comes.
Create a Pay StubThis guide is for general information and isn't tax advice. Tax rules change, individual situations differ, and the figures here are illustrative. For guidance on your own return, check the current Schedule 1-A instructions or talk with a qualified tax professional.