Who Qualifies for the Overtime & Tips Deductions

Overtime Deduction Eligibility (26 U.S.C. § 225)

You Must Be FLSA Overtime-Eligible

The overtime deduction only applies to workers who are entitled to overtime pay under Section 7 of the Fair Labor Standards Act (FLSA). This generally means:

• You are an employee (not an independent contractor)
• You work for an employer covered by the FLSA
• You are non-exempt from overtime requirements

Who Is EXEMPT (Does NOT Qualify)

The following workers are typically exempt from FLSA overtime and cannot claim the deduction:

• Executive, administrative, and professional employees (the "white collar" exemption)
• Outside sales employees
• Certain computer professionals (earning at least $27.63/hour)
• Highly compensated employees (earning $107,432+/year)
• Business owners with 20%+ equity who are actively engaged in management
• Certain transportation workers (truck drivers under Motor Carrier Act, airline employees, seamen)
• Agricultural workers in certain situations

Filing Requirements

• SSN Required: You must have a Social Security Number valid for employment and include it on your tax return
• Joint Filing: Married taxpayers must file jointly to claim the deduction
• W-2 Reporting: Starting in 2026, qualified overtime must be reported on W-2 Box 12, Code TT to be deductible

Tips Deduction Eligibility (26 U.S.C. § 224)

You Must Work in a Qualifying Occupation

The tips deduction only applies to workers in occupations that customarily and regularly received tips on or before December 31, 2024. The IRS has published a list of 70+ qualifying occupations in Treasury Regulations TD 10044.

You Must NOT Work for a Specified Service Trade or Business (SSTB)

Even if you work in a qualifying occupation, you cannot claim the tips deduction if your employer is a "specified service trade or business" (SSTB). This includes:

• Health (doctors, dentists, nurses, etc.)
• Law (attorneys, paralegals, etc.)
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Any trade or business where the principal asset is the reputation or skill of employees/owners

Example: A server at a law firm cafeteria would NOT qualify because the employer (the law firm) is an SSTB.

Tips Must Be "Qualified Tips"

Only certain types of tips qualify for the deduction:

• Must be voluntary: Paid by the customer without compulsion
• Must be customer-determined: The customer chooses the amount
• Must be cash or equivalent: Includes credit card tips and tip pool distributions

What Does NOT Qualify as Tips

• Automatic gratuities or mandatory service charges
• Tips from POS systems without a "no tip" option
• Negotiated amounts
• Non-cash gifts
• Tips that are actually recharacterized wages

Filing Requirements

• SSN Required: You must have a Social Security Number valid for employment
• Joint Filing: Married taxpayers must file jointly
• Reporting: Tips must be reported on W-2 Box 12 (Code TP), Form 4137, or applicable 1099
• Self-employed limit: Deduction cannot exceed net income from the business where tips were earned

MAGI Phase-Out (Both Deductions)

Both deductions are reduced for higher-income taxpayers based on Modified Adjusted Gross Income (MAGI):

Reduction: $100 for each $1,000 of MAGI over the threshold.

Official Sources

• 26 U.S.C. § 225 - Qualified Overtime Compensation
• 26 U.S.C. § 224 - Qualified Tips
• IRS: Questions and Answers About the Deduction for Qualified Overtime Compensation
• Treasury, IRS Final Regulations on Qualifying Tip Occupations