Labor law decides what you must be paid; tax law now decides how much of it is deductible. The two meet on the same paycheck, and the overtime deduction depends on getting the FLSA math right.
The example is invented but every rule is from the Fair Labor Standards Act regulations or IRS guidance: a server in a state that uses the federal tipped wage, paid $2.13 an hour in cash, who works 46 hours in a week, earns a $50 sales bonus promised in advance, and receives $420 in tips.
The employer may count up to $5.12 an hour of tips toward the $7.25 federal minimum wage if it gave the required notice and tips cover the credit. Here the credit is 46 × $5.12 = $235.52, well under the $420 of tips, so no make-up pay is owed. In a slow week where tips fell short, the employer would owe the difference. The tip credit calculator runs this weekly test with each state’s rate from the Department of Labor table.
Overtime is time and a half of the regular rate, and the regular rate counts more than the hourly wage. For a tipped employee it includes the cash wage and the tip credit (29 CFR 531.60), plus any nondiscretionary bonus (29 CFR 778.110); tips above the credit are not included. So the regular rate is ($7.25 × 46 + $50) ÷ 46 = $8.34 an hour, and the overtime premium is half of that for each of the 6 overtime hours.
| Paycheck line | Amount |
|---|---|
| Hours worked (7-day workweek) | 46 (6 overtime) |
| Cash wage, 46 × $2.13 | $97.98 |
| Tip credit, 46 × $5.12 (covered by tips) | $235.52 |
| Weekly sales bonus (nondiscretionary) | $50.00 |
| Regular rate: ($7.25 × 46 + $50) ÷ 46 | $8.34 an hour |
| Overtime premium: ½ × regular rate × 6 hours | $25.01 |
| Employer cash pay for the week | $172.99 |
| Tips kept | $420.00 |
| Total earnings | $592.99 |
Leaving the bonus out would put the premium at ½ × $7.25 × 6 = $21.75, short by $3.26 a week, an error that adds up in back pay. A bonus paid quarterly must be spread back over the weeks it covers and the overtime trued up (29 CFR 778.209). The regular rate calculator handles weekly and later bonuses, shift pay, commissions and two rates.
P.L. 119-21 created two federal income tax deductions for 2025 through 2028, available whether or not you itemize. Qualified tips: voluntary cash or charged tips in an occupation on the IRS list, up to $25,000 a year. Qualified overtime: only the FLSA-required premium above the regular rate, the "half" in time and a half, up to $12,500 ($25,000 on a joint return). Both shrink once modified AGI passes $150,000 ($300,000 joint). If this server had 48 similar weeks in a year:
| Item | Year total | Deductible |
|---|---|---|
| Qualified tips | $20,160 | $20,160 (cap $25,000) |
| Qualified overtime (FLSA premium only) | $1,200.52 | $1,200.52 (cap $12,500 single) |
The overtime deduction is based on the FLSA premium, so a correct regular rate matters twice: once for the pay itself and again for the deduction. If the employer pays more than the FLSA requires (double time, or overtime after 8 hours under a state law), the extra is not qualified overtime. Estimate your own with the no tax on tips calculator and the no tax on overtime calculator.
They lower taxable income for federal income tax only. They do not change what the employer must pay under the FLSA, the tip credit, or Social Security and Medicare withholding on wages and tips. Tips still must be reported to the employer.
Paying overtime on the hourly rate only when a bonus was earned. Using $2.13 to figure overtime instead of the full minimum wage. Testing the tip credit over a two-week pay period instead of each workweek. Counting state-law or contract overtime premiums toward the federal overtime deduction. Assuming service charges are tips: mandatory service charges are not tips under the FLSA. Treating every salaried worker as exempt: a salary below $684 a week, or a job that fails the duties test, still earns overtime; the exempt salary threshold calculator checks the federal and state pay levels.
This is an illustration, not legal or tax advice. Workers who think they were underpaid can contact the Wage and Hour Division (1-866-487-9243) or their state labor agency; employers should have payroll rules reviewed by an employment lawyer, and anyone near the deduction caps or phase-outs may want a tax professional.
29 CFR 531.50-531.60 and 29 CFR 778.110, 778.209 (eCFR, accessed October 22, 2026). U.S. Department of Labor, Fact Sheet 15 and the state tipped-wage table (revised July 1, 2026). IRS, Questions and answers about the new deduction for qualified overtime compensation (FS-2026-01, January 2026). IRS, What the No Tax on Tips deduction means for you (March 5, 2026). P.L. 119-21, secs. 70201-70202.
Yes, if it is nondiscretionary. It is added to the week’s pay before dividing by hours, which raises the regular rate and the overtime premium.
Yes. The regular rate includes the cash wage and the tip credit, but not tips above the credit.
Only the FLSA-required premium above the regular rate, the half in time and a half, up to $12,500 a year ($25,000 joint).
No. Both deductions are available with the standard deduction.
No. They reduce taxable income for federal income tax only.
No. Service charges set by the business are not tips under the FLSA, so they do not count toward the tip credit.