Yes, You Still Pay Social Security and Medicare on Tips and Overtime

The most common misunderstanding about the new law, cleared up in two minutes.

"No tax on tips" is a catchy name and a misleading one. The new deductions remove federal income tax from qualified tips and overtime premium. They do not touch payroll taxes. Social Security and Medicare come out of every dollar you earn, same as before.

What actually comes out of a tipped paycheck

Say you earn $2,000 in tips in a month. Your employer still withholds 6.2 percent for Social Security and 1.45 percent for Medicare, about $153. That part has not changed and will not be refunded. What changes is the federal income tax on those tips, which the deduction can bring to zero when you file, up to the $25,000 cap.

Overtime works the same way. The whole overtime check gets payroll taxes. Only the premium half of time and a half escapes federal income tax, up to $12,500 a year.

Why your paycheck did not get bigger

Many tipped workers expected fatter checks and did not see them. That is because the deduction happens at filing time on Schedule 1-A, not in your weekly pay. Unless you adjusted your W-4 withholding, the money arrives as a bigger refund in the spring instead of bigger checks all year.

The silver lining on Social Security

Paying Social Security tax on tips is not purely bad news. Those contributions build your earnings record, which sets your retirement benefit and your disability coverage. Workers who underreport tips save a little now and collect smaller Social Security checks for the rest of their lives. With the income tax gone from tips, reporting everything honestly has never been a better deal.

See your real number

The tips calculator and the overtime calculator show what the deduction is worth for your income and bracket, so you know what to expect in your refund rather than your paycheck.