Treasury and IRS Announce Penalty Relief for 2025 Tip and Overtime Reporting Under the One Big Beautiful Bill Act

The Internal Revenue Service (IRS) has issued new guidance offering transitional penalty relief for employers and payors navigating updated reporting requirements under the One Big Beautiful Bill (OBBB) Act. This relief applies specifically to tax year 2025 and addresses the complexities of reporting cash tips and qualified overtime compensation.

 

What’s Changing?

Under the OBBB Act, employers and other payors are now required to report:

  • Cash tips received by employees, along with the occupation of the tip recipient.
  • Qualified overtime compensation paid to employees.

 

These changes are designed to support new deductions available to certain employees and self-employed individuals for qualified tips and overtime. However, recognizing the challenges in implementing these requirements, the IRS is treating 2025 as a transition year.

 

Key Highlights of Notice 2025-62

To ease the transition, the IRS has announced the following penalty relief measures:

  • No penalties will be imposed for failing to separately report:
    • Cash tips and the occupation of the recipient.
    • Total qualified overtime compensation.
  • Relief applies only for tax year 2025, and only if the employer or payor otherwise submits a complete and correct return or statement.

 

The IRS acknowledges that many employers may not yet have the systems or procedures in place to comply with the new reporting standards. Additionally, Forms W-2 and 1099 will not be updated for tax year 2025 to reflect OBBB-related changes.

 

Encouraged Best Practices

While not mandatory for penalty relief, employers and payors are strongly encouraged to:

  • Provide employees and payees—especially those in tipped occupations—with:
    • Occupation codes
    • Separate accounting of cash tips
    • An indication of whether the employer’s business is a specified service trade or business
  • Offer separate reporting of qualified overtime compensation, which can help individuals claim deductions more easily.

 

This information can be shared via:

  • Online portals
  • Supplemental written statements
  • Secure digital methods
  • Box 14 of Form W-2 (for overtime compensation)

 

Looking Ahead

The IRS will release additional guidance to help individual taxpayers understand how to claim deductions for qualified tips and overtime compensation when filing their 2025 returns.

 

If you have any questions about this law, feel free to contact your Scheffel Boyle accountant or call us at one of our offices.