The IRS and U.S. Treasury have issued new guidance offering transition-year penalty relief for 2025 related to information-reporting requirements on tips and overtime pay under the One Big Beautiful Bill Act (OBBBA).
What This Means for Employers
For tax year 2025, employers and other payors will not be penalized for failing to separately report:
- The total amount of cash tips or the occupation of the individual receiving them, and
- The total amount of qualified overtime compensation paid.
This relief—outlined in IRS Notice 2025-62—applies only if the employer or payor otherwise files a complete and correct Form W-2 or 1099.
The IRS acknowledged that many payroll systems are not yet equipped to capture the new data points required by the OBBB. Because of this, Forms W-2 and 1099 will not be updated for 2025, and the year will be treated as a transition period for enforcement.
Encouraged, Not Required
Although separate reporting isn’t mandatory for 2025, the IRS encourages employers to:
- Provide employees with the occupation codes released earlier this year, and
- Offer a separate accounting of cash tips and overtime compensation—so employees can claim the related deductions on their individual 2025 tax returns.
Employers can share this information:
- Through a secure, online employee portal,
- On a separate year-end statement, or
- In Box 14 of Form W-2 for overtime information.
Background: New Deductions for Tips and Overtime
The One Big Beautiful Bill Act introduced two temporary provisions (effective 2025 through 2028) that allow qualifying workers to deduct:
- Qualified tips reported on a Form W-2, 1099, or Form 4137, and
- Qualified overtime compensation reported on a Form W-2 or 1099.
The IRS will issue additional guidance explaining how individuals can claim these deductions when filing 2025 returns.
Key Takeaways
- No new W-2 or 1099 fields for 2025; this is a transition year.
- Penalty relief applies only for 2025 and only if other filing requirements are met.
- Employers should begin preparing payroll and record-keeping systems for full compliance starting in 2026.
- Employees and payees should watch for future IRS guidance on claiming tip and overtime deductions.
Questions?
Hawkins Ash CPAs will continue to monitor updates from the IRS and Treasury regarding the One Big Beautiful Bill Act.
If you have questions about how this guidance may affect your payroll reporting or individual deductions, please contact your Hawkins Ash CPAs tax professional.
