“No tax on tips” and “no tax on overtime” were two of the most talked-about pieces of the One Big Beautiful Bill Act. They’re real, and for a lot of servers, bartenders, stylists, and hourly workers here in Central Pennsylvania, they’ll make a noticeable difference at tax time. Here is what no tax on tips Pennsylvania means for workers and employers.
But the catchy names don’t tell the whole story. These are federal deductions with limits, income caps, and paperwork requirements. And here in Pennsylvania, your tips and overtime are still fully taxed at the state and local level. Here’s what you can actually expect, what changes on your W-2 this year, and what employers need to have in place before January. In short, no tax on tips Pennsylvania is a federal story, not a state one.
How the Federal Deductions Work
First, the most important thing to understand: neither of these provisions stops tax from being withheld from your paycheck. Federal income tax, Social Security, and Medicare still come out of tips and overtime just like they always have. The benefit shows up later, when you file your return and claim a deduction that lowers your taxable income.
Both deductions are temporary. They apply to tax years 2025 through 2028, and they’re claimed on a new form, Schedule 1-A, that attaches to your Form 1040. You can claim them whether you take the standard deduction or itemize.
The tips deduction
- You can deduct up to $25,000 of qualified tips per year.
- “Qualified tips” are voluntary cash or charged tips from customers, including tips received through tip sharing. Mandatory service charges added to a bill don’t count.
- You have to work in an occupation that customarily and regularly receives tips. Treasury publishes the official list of qualifying occupations, which covers jobs like wait staff, bartenders, salon workers, and many personal service roles.
- If you’re self-employed, the deduction can’t exceed your net income from the business where you earned the tips.
The overtime deduction
- You can deduct up to $12,500 of qualified overtime compensation, or $25,000 if you’re married filing jointly.
- Only overtime required under the federal Fair Labor Standards Act counts, and only the premium portion. If you earn $20 an hour and get time-and-a-half for overtime, the deductible part is the extra $10 per hour, not the full $30.
- Overtime paid because of a union contract or company policy that goes beyond FLSA requirements generally doesn’t qualify.
Income limits
Both deductions start phasing out when your modified adjusted gross income exceeds $150,000, or $300,000 for joint filers. Married couples generally need to file jointly to claim either deduction.
Pennsylvania Doesn’t Follow Along
This is where Pennsylvania residents need to adjust their expectations. Pennsylvania’s personal income tax doesn’t automatically follow federal changes, and the state has not adopted either deduction.
Pennsylvania taxes compensation at a flat 3.07%, and tips and overtime are compensation. There’s no state standard deduction or personal exemption to soften it, either, so every dollar of tips and overtime is taxed at the state level from the first dollar to the last.
To put that in real numbers: a worker who earns $12,000 in overtime will still owe Pennsylvania about $368 in state income tax on that overtime, even if every dollar of the premium portion is deductible on the federal return.
Several bills have been introduced in Harrisburg that would exclude tips or overtime from state tax or create a credit to offset it. None has been enacted. If that changes, we’ll update this post.
Local Earned Income Tax applies too
Your local Earned Income Tax under Act 32 is based on earned income, which includes tips and overtime. So in addition to the state’s 3.07%, your local EIT rate applies to that income as well. For many Cumberland County workers, that’s another 1% or more.
Social Security and Medicare still apply
FICA taxes (7.65% for most employees) are unaffected by the new law. Tips and overtime remain fully subject to Social Security and Medicare withholding.
What’s Changing on Your W-2
For 2025 returns (filed earlier this year), the IRS treated the first year as a transition year. Employers weren’t required to separately report qualified tips or overtime on the W-2, so many workers had to rely on pay stubs or employer statements to calculate the deduction.
That changes with the 2026 Form W-2, which you’ll receive in January 2027. The redesigned form includes:
- Box 12, Code TP: total cash tips reported to the employer
- Box 12, Code TT: total qualified overtime compensation (the FLSA premium portion)
- Box 14b: the Treasury Tipped Occupation Code for your job
These numbers feed directly into Schedule 1-A, which should make the deduction much easier to claim next filing season. One detail worth knowing: if your employer reports occupation code 000 alone in Box 14b, your tips are not treated as qualified tips for the deduction.
What Pennsylvania Employers Need to Do Now
If you run a restaurant, salon, or any business that pays tips or FLSA overtime, the reporting burden lands on you. With no tax on tips Pennsylvania rules not applying at the state level, accurate payroll records matter even more. Before year-end, make sure your payroll setup can:
- Separately track cash and charged tips reported by employees
- Assign the correct Treasury Tipped Occupation Code to each tipped position
- Calculate the FLSA overtime premium separately from total overtime pay
- Distinguish FLSA-required overtime from overtime paid under company policy or a contract
Getting this wrong means inaccurate W-2s, frustrated employees, and potentially corrected forms after the fact. If you’re running payroll in-house, now is the time to confirm your software is ready. If you work with a payroll provider, ask them directly how they’re handling Codes TP and TT.
A Quick Example
Consider a server in Carlisle who earns $28,000 in wages and $18,000 in qualified tips, files single, and has no other income.
- Federal: She can deduct the full $18,000 in tips on Schedule 1-A, which lowers her federal taxable income significantly.
- Pennsylvania: She pays 3.07% on all $46,000, tips included.
- Local EIT: Her municipality’s rate applies to the full $46,000.
- FICA: Social Security and Medicare apply to the full $46,000.
The federal savings are real. They just aren’t the whole picture.
Frequently Asked Questions
Does no tax on tips Pennsylvania apply to state tax?
Yes. Pennsylvania has not adopted the federal tips or overtime deductions. Tips and overtime are taxable compensation at the state’s flat 3.07% rate, and they’re also subject to your local Earned Income Tax.
Is no tax on tips a deduction or an exclusion?
It’s a deduction. Tax is still withheld from your tips during the year, and you claim the deduction on Schedule 1-A when you file your federal return. That lowers your taxable income and can increase your refund.
How much overtime is tax free?
For federal income tax, you can deduct up to $12,500 of qualified overtime compensation, or $25,000 if you’re married filing jointly. Only the premium portion of FLSA-required overtime counts, typically the “half” in time-and-a-half. Overtime is still subject to Social Security, Medicare, Pennsylvania income tax, and local EIT.
Do I have to itemize to claim the tips or overtime deduction?
No. Both deductions are available whether you take the standard deduction or itemize. They’re claimed on Schedule 1-A of Form 1040.
When does no tax on tips and overtime end?
Both deductions are scheduled to apply for tax years 2025 through 2028. Unless Congress extends them, they expire after the 2028 tax year.
Why It Matters
For tipped and hourly workers, the no tax on tips Pennsylvania deduction can be worth real money, but only if it’s claimed correctly and only on the federal side. For employers, the new W-2 reporting requirements are already in effect for 2026 wages, and January will be here before you know it.
Cohick & Associates handles payroll for more than 200 local businesses and prepares thousands of individual returns every year. Whether you need help claiming the deduction or making sure your payroll is ready for the new W-2 codes, we can help. Schedule a call or reach us at 717-249-5321.
