These days, we get asked this question all the time:
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“Tips are automatically deducted, but why do I have to calculate my overtime myself?”
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“Overtime isn’t listed on my W-2—how do I claim it?”
Hearing this often, we realize how many people are confused.
Starting in 2025, the BBB Act (One Big Beautiful Bill Act, 2025–2028) introduces new above-the-line deductions for tips and overtime pay.
Here’s what every taxpayer needs to know from a tax professional’s perspective.
H2: 1. New Deductions: Tips & Overtime (OT)
Both deductions directly reduce taxable income, regardless of whether you take the standard or itemized deduction.
In our consultations, these questions come up more than any others.
| Deduction Type | Maximum Deduction | Applicable Years | Key Requirement |
|---|---|---|---|
| Eligible Tip Income Deduction | $25,000 | 2025–2028 | Tips voluntarily reported to employer |
| Eligible Overtime (OT) Premium Deduction | Single $12,500 / Married $25,000 | 2025–2028 | 0.5× premium portion of 1.5× OT under FLSA |
H2: 2. MAGI Income Limits (Phase-Out)
High-income taxpayers may not be able to claim the full deduction.
Many ask, “Am I even eligible?”
| Filing Status | Phase-Out Start (MAGI) | Deduction Eliminated (MAGI) |
|---|---|---|
| Single | Over $150,000 | $400,000+ |
| Married Filing Jointly | Over $300,000 | $600,000+ |
Phase-Out Calculation: For every $1,000 over the threshold, the deduction decreases by $100.
H2: 3. Why Tips Are Automatic, but Overtime Is Manual
H3: ① Tips Are Clearly Reported on the W-2
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Box 1: Wages, tips, other compensation
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Box 5: Medicare wages
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Box 7: Reported tips
The IRS can automatically calculate the deduction based on this information.
Many clients feel relieved: “Oh, I don’t have to calculate this myself!”
H3: ② Overtime Premium Is Not Shown Separately on the W-2
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Box 1 includes regular pay + OT + other premiums
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The IRS cannot determine the 0.5× premium portion from the W-2
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Payroll companies also do not report it separately
➡️ Therefore, the OT deduction must be claimed manually.
Clients must calculate the premium themselves and submit it to their tax preparer.
We often hear, “Wait, I have to calculate this myself?”—and yes, that’s the reality.
H2: 4. When and How to Claim
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2025 income → claim on your 2026 tax return
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It will not automatically reduce withholding on your paychecks
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IRS plans to adjust withholding tables in 2026, but 2025 income benefits must be claimed on the return
Expert Note:
“Tips are automatically tracked, but OT premiums aren’t in the payroll.
You need to provide the calculation yourself. We’ll use your MAGI and limits to make sure the maximum deduction is applied.”
H2: 5. How to Calculate Overtime Premium (Client Self-Calculation)
Under the BBB Act, the OT deduction applies only to the 0.5× premium portion beyond regular pay.
H3: Formula
H3: Required Information
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Regular Rate (hourly wage)
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OT Hours
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OT Gross Pay (1.5× total pay)
All of these are found on your pay stub.
H3: Example Calculation
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Regular Rate: $20
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OT Hours: 10
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OT Gross Pay: $300
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Regular pay portion = $20 × 10 = $200
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Actual OT Gross = $300
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OT Premium = $300 − $200 = $100 → eligible for deduction
H2: 6. Documents Clients Need to Provide
To claim OT accurately, you must provide:
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Annual pay stubs / payroll summary (including Regular Rate, OT Hours, OT Gross)
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W-2 (for reference)
OT premiums are not listed on the W-2, so for OT earned at other jobs, clients must calculate and submit the amounts themselves.
H2: 7. Conclusion
“We can calculate OT for payroll we manage internally, but we cannot access information from other employers.
Therefore, OT premiums earned elsewhere must be calculated by you and submitted for inclusion on your return.”