Calculator Methodology

How the Calculator Works

The overtime and tips tax calculators estimate your federal income tax savings from the OBBBA deductions using four steps:

1. Compute the deductible amount — overtime premium (0.5x) or annual tips
2. Apply the annual cap — $12,500/$25,000 for OT; $25,000 for tips
3. Apply the income phaseout — reduces deduction by $100 per $1,000 over threshold
4. Calculate tax savings — using the bracket-spanning method

The Bracket-Spanning Method

A common but incorrect approach is to multiply the deduction by your marginal tax rate. This fails when the deduction crosses a tax bracket boundary.

Our calculator uses the correct method:

This computes the full progressive tax with and without the deduction, then takes the difference. It automatically handles deductions that span multiple brackets.

Example: Bracket-Spanning

Consider a single filer with $120,000 MAGI and a $12,500 overtime deduction:

• Taxable income = $120,000 − $15,750 (standard deduction) = $104,250
• $104,250 falls in the 24% bracket ($103,351–$197,300)
• Reduced taxable = $104,250 − $12,500 = $91,750 (in the 22% bracket)
• The deduction spans the 24%/22% bracket boundary

Simple multiplication: $12,500 × 24% = $3,000 — incorrect.

Bracket-spanning: tax($104,250) − tax($91,750) = $17,867 − $15,099 = $2,768 — correct.

The $900 in the 24% bracket saves $216, the remaining $11,600 in the 22% bracket saves $2,552, for a total of $2,768.

Overtime Deduction Calculation

1. Overtime premium = hourly rate × 0.5 × OT hours/week × weeks/year
2. Cap = min(premium, $12,500 single/HoH or $25,000 MFJ)
3. Phaseout = ceil((MAGI − threshold) / $1,000) × $100 (if MAGI > threshold)
4. Final deduction = max(0, capped amount − phaseout)

The "fraction thereof" language in the IRS FAQ means partial $1,000 increments count as a full step (ceiling division).

Tips Deduction Calculation

1. Annual tips = monthly tips × 12
2. Cap = min(annual tips, $25,000)
3. Phaseout = same mechanism as overtime
4. Final deduction = max(0, capped amount − phaseout)

FICA Calculation

The OBBBA deduction does not reduce FICA taxes. The calculator shows FICA still owed as a reference:

FICA = total overtime pay (or annual tips) × 7.65%

This is the combined Social Security (6.2%) and Medicare (1.45%) rate from IRS Publication 15.

Data Sources

Known Limitations

• FICA simplified — uses a flat 7.65% rate. Does not account for the Social Security wage base cap ($176,100 in 2025) for high earners whose total wages exceed this threshold.
• 2025 data only — the calculator uses 2025 tax brackets and standard deductions. 2026 values will be added when confirmed by the IRS.
• Federal only — does not estimate state tax impact. Most states have not conformed to the OBBBA deductions.
• Standard deduction assumed — the calculator assumes you take the standard deduction. Itemizers may have different taxable income.
• No AMT calculation — Alternative Minimum Tax is not modeled.
• MAGI approximation — for most W-2 workers, MAGI equals AGI. If you have significant adjustments, your actual MAGI may differ.