Tax tip Tuesday #3 ’26: Tips and Overtime Income: New Tax Breaks for Workers.

February 10, 2026

New Individual Rules

• No federal tax on tips (2025–2028) up to income thresholds.
• Overtime pay up to $12,500 per taxpayer (or $25,000 joint) is exempt from federal tax (2025–2028).

This is one of the most talked-about features of the law: employees earning extra through tips or overtime could see smaller tax bills or larger refunds — if they qualify and report these amounts correctly.

Workers who earn a portion of their income through tips or overtime may see changes in how that income is treated for federal income tax purposes in 2025. Certain exclusions and adjustments were designed to reduce the tax burden on earned income, particularly for moderate-income employees.

These provisions apply only within defined limits and do not eliminate payroll taxes such as Social Security and Medicare. Income must still be reported accurately, and employers are still required to follow standard payroll reporting rules.

Who benefits most?

• Service industry workers
• Hourly employees earning overtime
• Moderate-income filers

Important note: These exclusions apply only within specific income thresholds and do not eliminate payroll taxes.

Tax Tip: Keep accurate records of tips and overtime. Proper reporting is essential to benefit from any available exclusions.