New Paycheck & Tax Deduction Tools for 2026 and 2027

1. Why only the "half" counts in time-and-a-half overtime

Under the Fair Labor Standards Act (FLSA 29 U.S.C. § 207), covered non-exempt employees receive at least one and one-half times their regular rate of pay for all hours worked over 40 in a workweek. The statutory language of the One Big Beautiful Bill Act creates a deduction specifically for the premium portion of overtime compensation—meaning the 0.5x multiplier.

For example, if you earn a standard wage of $40 per hour, your overtime rate is $60 per hour ($40 base + $20 premium). Under the law, the $40 regular wage for that hour remains fully subject to standard federal income tax. The $20 premium portion is what qualifies for the above-the-line deduction, up to the annual limit of $12,500 (single) or $25,000 (married filing jointly).

2. The $25,000 Tip Income Deduction

Hospitality and service employees in customary tipped occupations can deduct up to $25,000 of qualified tip income from their adjusted gross income. Crucially, tips remain subject to mandatory payroll taxes (FICA: 6.2% Social Security and 1.45% Medicare) to preserve credit accumulation toward Social Security retirement benefits.

3. Income Phase-Outs (MAGI Thresholds)

To ensure the tax relief targets low- and middle-income workers, both the overtime and tip deductions are subject to income phase-outs starting at $150,000 Modified Adjusted Gross Income (MAGI) for single filers, and $300,000 for married couples filing jointly. The deduction phases out proportionally over a $25,000 window ($50,000 for joint filers).