No Tax on Overtime and Tips: What the 2026 Deductions Really Do

What the law actually does

Public Law 119-21, signed in July 2025, created two deductions for tax years 2025 through 2028. The overtime deduction removes from federal taxable income the premium portion of overtime pay required by the FLSA — the «half» in time-and-a-half — up to $12,500 ($25,000 joint), reduced by $100 for every $1,000 of modified adjusted gross income above $150,000 ($300,000 joint). The tips deduction removes reported tips in occupations that customarily receive them, up to $25,000, with the same phase-out. Both are «below the line» deductions available whether or not you itemise. Neither touches Social Security, Medicare or state tax, and neither changes withholding: the W-2 will report qualified overtime and tips in new boxes, and the deduction is claimed on the return.

What the overtime deduction is worth

Only the premium counts. Someone at $22 an hour working five overtime hours a week for 52 weeks earns $8,580 of overtime pay, of which the premium is $2,860 — the deduction is $2,860, worth $343 at the 12% bracket or $629 at 22%. To reach the $12,500 cap takes $25,000 of premium-bearing overtime, roughly 570 overtime hours at $22; few people get there. Overtime required only by state law (daily overtime in California, for instance) or by a contract does not qualify; only FLSA-required overtime does, though the IRS has allowed employers to report the FLSA-equivalent portion. The overtime calculator estimates the premium and the deduction for your hours.

What the tips deduction is worth

A server reporting $900 of tips every two weeks — $23,400 a year — deducts $23,400, worth about $2,808 at 12%; someone with $30,000 of tips deducts the $25,000 cap. The deduction requires the tips to be reported (unreported tips were never taxed, illegally) and the occupation to be on the Treasury list of customarily tipped occupations, which covers restaurant, bar, hospitality, beauty, delivery and similar work. Mandatory service charges are not tips and do not qualify. FICA on the tips is unchanged — 7.65% still comes out of the cash wages — and the tips still count toward Social Security benefits, which is the reason to keep reporting them. The tip calculator shows the cash paycheck and the deduction.

Why your paycheck does not change

Withholding tables do not know about either deduction, and the IRS did not change them for 2026; the benefit arrives as a larger refund or a smaller bill when the 2026 return is filed in 2027. An employee who wants it earlier can lower withholding through W-4 step 4(b) by the expected deduction — $2,860 on 4(b) for the overtime example — and the W-4 fixer computes the line. That is the only way «no tax on overtime» reaches a 2026 paycheck, and it is the employee's move, not the employer's.

The other new deductions

The same law added a $6,000 deduction per person aged 65 or over, phasing out at 6% of income above $75,000 ($150,000 joint), for 2025 through 2028; a deduction for interest on loans for new US-assembled cars, up to $10,000; a larger standard deduction ($16,100 single, $32,200 joint in 2026) and a $2,200 child tax credit, both indexed; and it made the 2017 rate structure permanent. The what changed in 2026 guide has the full list and a 2025-to-2026 comparison for any salary.

The three taxes on a paycheck, and why they behave differently

Federal income tax is progressive and starts from zero: the first $16,100 a single filer earns in 2026 is untaxed because that is the standard deduction, and the rate then climbs through seven brackets from 10% to 37%. It is the only line your W-4 changes. FICA is flat from the first dollar — 6.2% for Social Security up to $184,500 of wages and 1.45% for Medicare without limit — and no form changes it. State income tax is whatever your state decided: nothing in 9 states, one flat rate in 13, brackets in the other 29, and 11 states let a city or county add a line of their own.

On the $2,307.69 biweekly example above: $193.08 of federal withholding, $176.54 of FICA and $0.00 of Texas tax. Keeping them on separate lines is the point: a 401(k) contribution moves the first and third but not the second; a raise moves all three at different rates; the Social Security cap moves only the second. A single «taxes» figure hides which lever does what.

Withholding is not your tax

Every federal line on a paycheck is an estimate your employer makes on your behalf, following your W-4 and IRS Publication 15-T; the tax itself is settled once a year on your return. On $60,000 in Texas, the year's withholding comes to $5,020 against a projected tax of $5,020: $0 more than needed, which returns as a refund. Neither a refund nor a bill is a mistake by anyone; it means the W-4 on file did not describe the year exactly, and both are fixed on the W-4, not on the paycheck.

The three places the estimate goes wrong most: a second income in the household without the box in step 2(c) checked, so that both employers apply the full $16,100 standard deduction; a bonus withheld at the flat 22% when the marginal rate is something else; and untaxed side income with nothing on step 4(a). From 2026 there is a fourth, in the taxpayer's favour: the deductions for overtime premium pay and tips reduce the tax but not the withholding. The W-4 fixer turns the gap into the exact lines to change.

What changed in 2026

The standard deduction is $16,100 single, $32,200 joint and $24,150 head of household; every bracket threshold moved up with inflation; the Social Security wage base is $184,500; the 401(k) elective limit is $24,500. Each is read from the document that sets it — IRS Revenue Procedure 2025-32, the SSA's contribution and benefit base, IRS Notice 2025-67 — and listed with its source under the calculator.

The bigger change is the set of new federal deductions: qualified overtime premium pay up to $12,500 ($25,000 joint), reported tips up to $25,000, and $6,000 more for each person aged 65 or over, all phasing out above $150,000 of income. None of them changes what an employer withholds, because Publication 15-T does not know about them; they reduce the tax owed at filing, which is why the calculators on this site show them in the «withholding vs what you owe» box rather than on the paycheck. The what changed in 2026 guide keeps the dated list, including state changes.

A worked example: $45,000 in Georgia, paid twice a month

Take $45,000 a year in Georgia, paid twice a month (24 paychecks), single, standard W-4, no pre-tax deductions. The gross per paycheck is $1,875.00. Federal income tax withholding, from the 2026 Publication 15-T percentage method, takes $134.17. Social Security takes 6.2% of gross, $116.25, and Medicare 1.45%, $27.19. Georgia withholds $68.61 under its flat rate and deductions. The net deposit is $1,528.78, 81.5% of gross; over the year that is $36,691 from $45,000, an effective rate of 18.5% on all taxes together. Every line is reproducible from the documents on the sources page, and the table below lists them in the order they appear on a stub.

Two things on that stub are not obvious from the totals. First, the federal line is withholding, not tax: the tables annualise this paycheck as if all 24 were identical, and the year's actual tax, $3,220, differs from the $3,220 withheld by $0, which becomes a refund in April. Second, Social Security and Medicare are the same fraction of every paycheck of the year, because the salary is under the wage base, and no form can change them; only Section 125 deductions reduce their base. The reading guide walks each line and names what it should equal.

Nearby salaries: what $25,000 to $80,000 leave in Georgia

A raise or a job offer is rarely at the round number on this page, so here is the ladder around it: the same twice a month paycheck at 6 salaries from $25,000 to $80,000, single, standard W-4, no deductions. The effective rate climbs from 13.8% to 22.9% across the range because federal income tax is progressive while FICA is flat; each extra $10,000 of salary leaves less than the last, and the pay raise calculator prices any step exactly. The salary after tax pages carry the full range, one page per amount.

Reading the ladder the other way answers the interview question: to take home $10,000 more a year in Georgia takes a raise of roughly $12,962 in gross at this level, because the new dollars are taxed at the marginal rate rather than the average. The state column grows in a straight line, since Georgia charges one rate; the FICA column grows in a straight line until the wage base. The gross-up calculator runs the reverse computation for any net.

The same paycheck under each filing status

Filing status is the one W-4 line everyone fills in, and it moves the federal line more than most people expect. On $45,000 in Georgia, paid twice a month, a single filer is withheld $134.17 per paycheck; married filing jointly (one income) $53.33, because the joint table doubles the standard deduction to $32,200 and widens every bracket; head of household $89.50, with its $24,150 deduction and its own brackets. Married filing separately uses the single table. Georgia's own deductions and brackets are the same for joint filers, which is why the state column moves too. Picking «married» with two incomes and skipping step 2 is the commonest cause of an April bill; the W-4 guide covers the choice.

The last column shows why the status matters beyond the paycheck: the year's federal income tax on $45,000 is $3,220 single and $1,280 married filing jointly on one income, a difference of $1,940 that the W-4 status either delivers through the year or holds back for a refund. Head of household is the status most often missed by single parents, who leave $1,072 a year on the single table. FICA is identical in every row, since it has no status.

The whole year on $45,000: withholding, tax due, and the settlement

24 paychecks of $1,875.00 withhold $3,220 of federal income tax over 2026. The tax actually due on the return, with the $16,100 standard deduction and no credits, is $3,220, so the year ends with a refund of about $0 — the gap between the withholding tables' approximation and the exact computation. The marginal rate on the last dollar is 12%; the effective rate on all taxes together is 18.5%. Social Security applies to every paycheck of the year, because $45,000 is under the $184,500 wage base. The 2026 deductions for overtime premium and tips apply at filing to anyone with qualifying pay; they do not change these paychecks. Georgia takes $1,647 for the year, 3.7% of salary.

Refund or bill: what the year settles

Withholding is a prepayment; the return computes the tax and returns or collects the difference. On $45,000 with these settings the year withholds $3,220 against $3,220 due, so the settlement is a refund of about $0. A refund is money lent to the Treasury at no interest for up to sixteen months; a bill is fine up to a point and penalised beyond it. The point is the safe harbour: withholding of at least 90% of this year's tax ($2,898 here) or 100% of last year's (110% above $150,000 of income) avoids the underpayment penalty, which is interest on each quarter's shortfall. These paychecks clear the 90% harbour on their own.

What makes the settlement move: credits the W-4 does not carry (the earned income credit, education credits, the 2026 overtime and tip deductions), which enlarge the refund; a second income, other income, or too many dependents on the form, which produce the bill; a bonus withheld at the flat 22% when the marginal rate is 12%, which over-withholds at this salary; and a change of job or a partial year, which annualises each paycheck wrongly. The W-4 fixer sets the lines that bring the settlement to zero, or to a chosen refund.

What deductions do to this paycheck

Deductions are where the same salary produces different paychecks. A 6% traditional 401(k) contribution — $112.50 per paycheck on $45,000, well under the $24,500 annual limit — reduces federal and state taxable wages but not FICA wages, so it costs $93.39 of take-home rather than its face value. A $150 Section 125 deduction for health premiums or an HSA reduces every base including FICA, and costs $113.04. A Roth contribution of the same 6% comes out after tax and costs the full amount now in exchange for tax-free withdrawals later. The table gives each case for this paycheck; the pre-tax deductions calculator runs any amount and the 401(k) calculator draws the whole curve.

The order matters on the stub as well as in the arithmetic. Section 125 items come off first and reduce the FICA wages line, which is why a health premium lowers the Social Security and Medicare figures by 7.65% of itself; the 401(k) comes off next and reduces federal taxable wages only. Both appear in the W-2: box 1 (federal wages) is gross minus both, boxes 3 and 5 (Social Security and Medicare wages) are gross minus the Section 125 items alone. An employer match, where there is one, is added on top of the contribution and never touches the paycheck; the compare two jobs tool values it.

What each W-4 line does to this paycheck

The federal line is the only tax on the stub that a form can change, and each step of the W-4 moves it by a predictable amount. One qualifying child on step 3 lowers withholding by $91.67 per paycheck — the $2,200 credit spread over 24 paychecks — taking the net to $1,620.45. Checking box 2(c) for a second job raises it by $94.37, because the checkbox table halves the brackets so that each job is withheld as if it earned half the household income. Extra withholding on 4(c) is dollar for dollar. Other income on 4(a) adds the tax on it at the marginal rate; deductions on 4(b) remove it. The table runs each case for $45,000 in Georgia; the W-4 fixer computes the combination that makes the year's withholding equal the year's tax.

None of these lines changes the tax; they change when it is paid. Claiming a child that is not yours on step 3, or deductions you will not take on 4(b), enlarges every paycheck and produces the same amount plus a penalty in April. The lawful levers are the ones you are entitled to — the children you have, the deductions you will itemise, the second income you must account for — and the fixer applies exactly those. A new W-4 takes effect from the next payroll run after your employer receives it, and the year-to-date withholding already taken is not recomputed.

$45,000 in Georgia against nine other states

Federal tax and FICA are the same everywhere; the state line is what moves. On $45,000 paid twice a month, the nine states with no wage tax leave $1,597.39 per paycheck; California leaves $1,564.78, $32.61 less, or $783 over the year. Flat-rate states sit in between and their rate is the whole story; bracket states depend on the salary. Prices move more than taxes between most of these states, and the state pages carry the BEA price index beside the take-home; the state ranking sorts all 51 for any salary.

Two cautions before reading the table as a moving guide. The state taxes wages where the work is done, with the resident state taxing everything and crediting the work state, so a remote job does not change the column unless you change where you live — and five states apply a «convenience of the employer» rule that keeps taxing remote work done elsewhere. And the no-tax states collect the difference elsewhere: property tax in Texas and New Hampshire, sales tax in Tennessee and Washington. The no-income-tax guide and the local taxes guide cover both.

A raise on $45,000: what arrives

A raise is taxed at the margin, so what reaches the account is the raise minus the marginal federal rate, FICA and the state's marginal rate on the new dollars only. A 3% raise on $45,000 in Georgia adds $56.25 of gross to a twice a month paycheck and $42.39 of net, 75.4% of it; against 3% inflation it is a real raise of about 0.0%. Nothing about the raise changes the tax on the salary below it — the «pushed into a higher bracket» fear describes arithmetic that does not exist in a progressive system. The table runs three sizes; the pay raise calculator runs any, with the inflation figure you enter.

A bonus on top of $45,000

A bonus paid separately is withheld at the flat 22% federal rate plus FICA and state: a $1,000 bonus leaves $701.42 and a $5,000 bonus $3,507.10 in Georgia. Paid inside a regular paycheck under the aggregate method, the same bonuses are withheld $130.41 and $1,046.41 federally instead of $220.00 and $1,100.00, because the combined paycheck is annualised as if it recurred. The tax actually owed is the marginal rate — 12% at this salary — so the $5,000 bonus is really taxed $600.00 federally and the flat method returns $500.00 at filing. The bonus calculator shows both methods for any amount and state.

$45,000 on each pay schedule

The annual figures do not change with the pay schedule — $45,000 in Georgia leaves the same $36,691 whether it arrives 52 times or 12 — because the withholding tables are the annual tables divided by the number of periods. What changes is the slice: a semi-monthly paycheck is 8.3% larger than a biweekly one, a monthly one more than double a biweekly one, and a weekly one half. Budgets are built from the slice, which is why the pay periods guide and the biweekly vs semi-monthly guide matter more than the small difference in withholding precision between them.

Employers choose the schedule, within the minimum their state sets, and the choice follows the workforce: hourly staff are usually paid weekly or biweekly because overtime is computed by the workweek, and salaried staff semi-monthly or monthly because their pay does not vary. A change of schedule re-spreads every per-paycheck deduction — a monthly premium divided by 2 instead of 2.1667 — and usually leaves a one-time gap between the last paycheck on the old schedule and the first on the new. The table gives $45,000 on all four; the frequency pages carry the calendar for each.

Common mistakes

Expecting overtime pay to be untaxed on the paycheck. It is withheld as always; the deduction comes at filing. Counting the whole overtime pay. Only the premium half qualifies. Expecting FICA relief. None.

Reading the flat 22% on a bonus as the tax on it. It is withholding; the tax is your marginal rate. Budgeting from the wrong paycheck: biweekly and semi-monthly differ by about 7.7%. Claiming the same child on two W-4s, which under-withholds the household by the credit. Assuming a raise can push you into a bracket that leaves you worse off — in a progressive system it cannot. Forgetting the Social Security cap: above $184,500 the later paychecks are larger, and a budget built on January's paycheck is too tight for December's.