Treasury and IRS Announce Penalty Relief for 2025 Tip and Overtime Reporting Under the New Tax Law
The Department of the Treasury and the Internal Revenue Service (IRS) have released new guidance offering a crucial reprieve to employers and other payors. This guidance provides penalty relief for the 2025 tax year regarding the new information reporting rules for cash tips and qualified overtime compensation enacted by the legislation we’ll call the “One Big Beautiful Bill” (OBBB).
The Transition: Penalty Relief for Tax Year 2025
Notice 2025-62 confirms that employers and payors will not face penalties for failing to meet the new OBBB information reporting requirements for the 2025 tax year. This relief covers both the failure to file correct information returns with the government and the failure to provide correct payee statements to employees and other payees.
Specifically, you are protected from penalties for failing to:
- Provide a separate accounting of any amounts reasonably designated as cash tips or the occupation of the person receiving those tips.
- Separately provide the total amount of qualified overtime compensation.
This relief applies only to returns and statements filed for Tax Year 2025. To qualify, you must still file and provide an otherwise complete and correct return or statement (like the standard W-2 or 1099).
Why the Relief? A One-Year Grace Period
The Treasury and IRS recognize a reality: many employers don’t have the systems, procedures, or software updates in place yet to track and report this new, granular data required by the OBBB.
Crucially, the IRS also announced that the current Forms W-2 and 1099 will not be updated for tax year 2025 to reflect these OBBB-related changes.
Therefore, Tax Year 2025 will be treated as a transition period for the IRS’s enforcement of the new reporting requirements for tips and qualified overtime.
What You Should Still Do (A Strong Encouragement)
While this relief means no penalties, the agencies strongly encourage employers and payors to help their employees take advantage of the tax deductions the OBBB offers.
To help your employees claim their deductions, you are encouraged to provide them with:
- For Tipped Employees: The occupation codes and a separate accounting of cash tips received.
- For Overtime: A separate accounting of the qualified overtime compensation.
How to get this information to your employees:
- An online portal.
- Additional written statements.
- Other secure methods.
- For qualified overtime: You may use Box 14 on the employee’s Form W-2.
The Underlying Law: New OBBB Reporting Requirements
Remember, these are the new requirements that will fully take effect after the 2025 transition period:
- Tax Deduction for Tips: Certain employees and self-employed individuals can deduct qualified tips reported on a Form W-2, 1099, or directly on Form 4137. This is why payors are ultimately required to provide statements and file returns showing certain cash tips and the tip recipient’s occupation.
- Tax Deduction for Overtime: Certain individuals can deduct qualified overtime compensation reported on a Form W-2 or 1099. Payors are required to file returns and provide statements showing the total amount of qualified overtime compensation paid.
Next Steps: The IRS will release additional guidance for individual taxpayers on how to claim these new deductions for qualified tips and qualified overtime compensation when they file their 2025 tax returns.
