First W-4 for a Tips or Overtime Job: What to Enter

If your first job involves tips or regular overtime, your W-4 setup matters because the OBBBA deductions for tips (up to $25,000) and overtime premiums (up to $12,500) reduce your federal income tax but do not reduce withholding automatically. Your employer withholds tax as if these deductions do not exist. You may want to claim additional adjustments in Step 4(b) to account for these deductions and avoid a larger-than-expected refund - or just wait until your first year is done.

Tips job: how withholding works

If you work in a tipped occupation (server, bartender, hair stylist, valet, or other positions where tipping is customary), you are required to report your cash tips to your employer. Your employer then withholds federal income tax and FICA taxes on your total wages - including your reported tips - each pay period.

Key facts about tip withholding:

• FICA applies to all tips: Social Security (6.20%) and Medicare (1.45%) are withheld on your reported tips just like regular wages. FICA is not reduced by the OBBBA tips deduction.
• Federal income tax is withheld using your W-4 settings: Your employer includes tips in your gross wages for withholding purposes. The same tables that apply to regular wages apply to tips.
• Tips below $20 per month per employer: Tips totaling less than $20 in a calendar month from a single employer are not subject to withholding or reporting requirements. Above that threshold, all tips must be reported and are subject to withholding.

The OBBBA tips deduction

The One Big Beautiful Budget Act (OBBBA), effective for tax year 2026, created an above-the-line deduction for tip income earned in qualifying occupations. Key parameters:

• Maximum deduction: $25,000 per year per taxpayer (not per household).
• Qualifying occupations: Jobs that customarily receive tips as defined under IRC §45B. Your employer must use W-2 Box 12 Code TP starting in tax year 2026 to identify qualifying tip amounts.
• FICA still applies: The deduction reduces your federal income tax only. You still pay Social Security and Medicare on all tip income.
• MFS ineligible: Married Filing Separately filers cannot claim this deduction.
• Sunset date: December 31, 2028.

The practical effect: if you earn $20,000 in tips in a qualifying job, you may deduct up to $25,000 from your taxable income when you file. But your employer withheld income tax all year as if no deduction existed. This means you may receive a refund when you file - unless you adjust your W-4.

Overtime job: how withholding works

If your job regularly involves overtime hours, your withholding has an additional nuance. The IRS treats overtime pay as supplemental wages. Employers may withhold federal income tax on supplemental wages using a flat supplemental rate of 22% (for the first $1 million in supplemental wages annually), rather than applying the standard payroll withholding tables to the combined amount.

For workers in the 10% or 12% bracket - which covers most first-job workers - the 22% supplemental rate withholds more than your actual marginal rate. Combined with the OBBBA overtime deduction (which reduces the taxable portion of your overtime), significant over-withholding is possible for workers with regular overtime.

The OBBBA overtime deduction

The OBBBA also created an above-the-line deduction for overtime premium pay under IRC §225. Key parameters:

• Maximum deduction: $12,500 per year for single filers and head of household ($25,000 for married filing jointly).
• Premium portion only: Only the premium above your regular hourly rate qualifies. For time-and-a-half, the premium is 0.5x your regular rate per overtime hour. Example: regular rate $20/hour, overtime rate $30/hour, deductible premium = $10 per overtime hour.
• FLSA overtime only: You must be a non-exempt employee under the Fair Labor Standards Act. Salaried-exempt employees and self-employed workers do not qualify.
• FICA still applies: The deduction reduces federal income tax only.
• MFS ineligible: Married Filing Separately filers cannot claim this deduction.
• Sunset date: December 31, 2028.

How to adjust Step 4(b) for OBBBA deductions

Step 4(b) of the W-4 is labeled "Deductions." It is designed for filers who plan to itemize deductions beyond the standard deduction. However, it also applies to above-the-line deductions that reduce your taxable income - including the OBBBA tips and overtime deductions.

To adjust for these deductions on your W-4:

1. Estimate your qualifying tip income or overtime premium income for the year. If you are unsure, use a conservative estimate based on recent pay periods.
2. Enter the estimated deduction amount in Step 4(b). For example, if you expect $15,000 in qualifying tip income and are confident it qualifies for the deduction, enter $15,000 in Step 4(b).
3. This tells your employer to reduce withholding to account for the reduced taxable income.

Use the IRS Tax Withholding Estimator to calculate the right amount if you are unsure. The estimator allows you to enter additional above-the-line deductions.

When NOT to adjust: first year advice

For your first year in a tipped or overtime job, consider waiting before adjusting your W-4. Here is why:

• You may not know your annual tip or overtime income yet. If you over-estimate and reduce withholding too much, you may owe taxes at filing time plus an underpayment penalty.
• The qualifying occupation rules are new. The IRS is still issuing guidance on which occupations qualify under IRC §224. If your occupation turns out not to qualify, you will have under-withheld.
• A refund is not the worst outcome. If you do not adjust your W-4 and simply file your return claiming the deduction, you receive a refund. You lose the time value of money, but you avoid owing.

After your first full year, you will have actual numbers. Update your W-4 at the start of the next tax year using your prior-year tips or overtime as an estimate.