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Tips & Overtime Tax Hack

Hello, and welcome back to the Guerrero CPA Podcast. I’m your host, Ai Eddie, here to cut through the noise and bring you tax updates that actually matter to your wallet.

If you worked hard in 2025 and earned extra cash through tips or overtime, the IRS may have some new deductions that can put more of your money back in your pocket. Let’s break down the rules and strategies so you don’t leave money on the table.

1. Tips: Know What You Can Deduct

If you work in hospitality, food service, delivery, or wellness, you could qualify for a deduction of up to $25,000 of tip income. This includes:

  • Cash tips

  • Credit card tips

  • Tips from a tip-sharing pool

Who’s excluded?
Workers in law, accounting, health, or financial services are not eligible for this deduction.

Income Limits for Tip Deductions

The IRS looks at your Modified Adjusted Gross Income (MAGI):

  • Single: Full benefit under $150,000, phases out, gone at $400,000

  • Married Filing Jointly: Full benefit under $300,000, gone at $550,000

2. Overtime: Your Extra Hours Count

For mandatory overtime under Section 7 of the Fair Labor Standards Act, you may deduct up to:

  • $12,500 for single filers

  • $25,000 for joint filers

Important:

  • Only the overtime premium counts (the extra half). For example, if your regular rate is $20/hour and your overtime rate is $30/hour, the deductible part is $10/hour.

  • Overtime premiums from state laws or union contracts that aren’t federally required typically do not qualify.

Income Limits for Overtime

  • Phase-out starts at $150,000

  • Deduction disappears at $275,000 for singles

3. Key Notes to Keep in Mind

  • State & local taxes still apply.

  • Federal payroll taxes (Social Security & Medicare) still apply.

  • Report this income on your W-2, with full IRS rules kicking in for 2026.

Why This Matters

Understanding these deductions is critical because:

  • They reduce federal income tax, but only if claimed correctly.

  • Missing the details—like MAGI limits, Section 7 rules, or overtime premiums—can mean leaving money on the table.

  • A CPA can help ensure you maximize your deductions and stay compliant.

Take Action

If you received tips or overtime in 2025, Guerrero CPA can help determine your eligibility and ensure you claim every dollar you’re entitled to.

Don’t leave money behind—schedule your consultation today and let us help you keep more of your hard-earned cash.

Call: 210-490-7100
Visit: www.guerrerocpa.com