Stereotype humor is a highly prevalent but particularly divisive phenomenon, with the potential for both negative and positive social implications. While highly subjective, interpretations of stereotype humor's subtext (support/challenge of stereotype) have major implications for reactions to this type of humor. This experimental study (N = 104) represents a novel investigation of the effect of two facets of stereotype humor, explicitness of stereotyping and stereotype distortion, on judgments of stereotype endorsement (support) versus subversion (challenge) in memes about four different groups (Asian, Hispanic, Irish, White) and associated group stereotypes. In this completely within-subjects design, participants viewed several memes about the target groups which varied systematically by the two factors of interest and provided judgments of stereotype endorsement versus subversion, ratings of funniness, and ratings of offensiveness. Multilevel models were used to determine the effect of explicitness, distortion, and their interaction, as well as target group, on judgements of stereotype humor while accounting for nesting of responses within participants. Results showed that stereotype distortion (e.g., exaggeration) and explicit stereotyping (e.g., overtly linking group to stereotype) both significantly predicted greater ratings of subversion. Unexpectedly, stereotype distortion also predicted greater levels of offense. Interestingly, marginalized group membership (i.e., Asian, Hispanic) significantly predicted lower ratings of subversion, lower funny ratings, and higher offense ratings. Findings highlight the significant role of explicitness and distortion when considering how individuals interpret the subtext of stereotype humor. Furthermore, findings underscore the major influence of group status on judgments and social implications of this type of humor. Overall, this study contributes to a better understanding of the mechanisms by which individuals interpret stereotype humor, providing valuable insights for promoting better intergroup relations and communication.