How to adjust your W-4 for tips and overtime

What you are actually doing

The deduction is worth the same either way. What changes is when you get it. Do nothing and your employer withholds as though the deduction does not exist, you overpay all year, and the difference comes back as a refund in 2027. Tell your employer about it and the money arrives in each paycheck instead.

IRS Publication 15 says this in as many words: employers must honour an updated W-4 so an employee can receive more money in each paycheck instead of waiting until filing their income tax return.

Where the new lines are

On the 2026 form, the entry point is Step 4(b), and the figure you put there comes from the Step 4(b) Deductions Worksheet on page 4. That worksheet now opens with your two deductions:

• Line 1a — qualified tips. An estimate of your qualified tips, up to $25,000, if your total income is under $150,000 ($300,000 filing jointly).
• Line 1b — qualified overtime. An estimate of your qualified overtime, up to $12,500 ($25,000 filing jointly), of what the form calls the “and-a-half” portion of time-and-a-half compensation — the premium only, not the whole overtime line.

The worksheet is shorter than it looks

Fifteen lines is intimidating, and most of them are for people itemising deductions. If you take the standard deduction and have no itemised deductions, no student loan interest and no charitable carry-over, everything between line 3 and line 14 comes out at zero.

Line 15 is the sum of lines 2, 4, 5 and 14. With those three at zero, line 15 is simply line 1a plus line 1b — your tips estimate plus your overtime premium estimate. That single number goes in Step 4(b) on the form itself.

A server expecting $8,000 in tips and $2,000 of overtime premium writes $8,000 on 1a, $2,000 on 1b, $10,000 on line 2, $10,000 on line 15, and $10,000 in Step 4(b). That is the whole job.

Estimate low, not high

This is the part worth being careful about. Step 4(b) tells your employer to withhold less. If you overestimate — you assume a year of heavy overtime and the hours dry up — you will have underpaid, and the shortfall is due in April, possibly with an underpayment penalty.

Nobody is penalised for estimating conservatively. If you are unsure, put in the amount you are confident you will earn rather than your best year, and adjust upward later. A W-4 can be changed as many times as you like.

Two things it does not do

It does not change what you owe. The tax is the same; only the timing moves. And it does nothing about Social Security and Medicare, which take 7.65% of tips and overtime regardless and are not affected by the W-4 at all.

When to hand it in

As early in the year as you can. The adjustment only affects paychecks issued after payroll processes it, so a W-4 submitted in November spreads the benefit across the few weeks left. Submitted in January, it spreads across the whole year.

If you are reading this late in the year, it is still not wasted — you are simply choosing between a smaller refund now and a larger one later. Neither is a tax saving. Both are your money.

Does your state care?

Almost certainly not. Most states start their calculation at your federal adjusted gross income, and these deductions sit below it, so state withholding usually carries on unchanged whatever you put on the federal W-4. A handful of states do follow along.