Penalty Relief for Reporting Tips and Overtime Under the One Big Beautiful Bill
IRS Notice 2025-62; IR-2025-110, Nov. 5, 2025
The IRS will not impose penalties on employers or payors for failing to separately report cash tips or qualified overtime compensation for tax year 2025, treating the year as a transition period under the One Big Beautiful Bill (OBBB).
Purpose of the Notice
For 2025, the IRS and Treasury are providing penalty relief for employers and payors that cannot yet comply with the new OBBB information reporting requirements for cash tips and overtime pay.
The IRS will treat 2025 as a transition year before enforcement begins.
Key Points of Relief
No penalties for not separately identifying cash tips or reporting the occupation of the tip recipient.
No penalties for not separately reporting qualified overtime compensation.
Relief applies only to tax year 2025 and only if the filer otherwise provides a complete and correct return or statement.
Forms W-2 and 1099 will not be updated for 2025 to include OBBB-specific reporting fields.
Background: OBBB Reporting Requirements
The One Big Beautiful Bill created two new categories of deductible compensation for individuals:
Qualified tips: Employees and self-employed individuals may deduct qualified tips reported on Form W-2, Form 1099, or Form 4137.
Qualified overtime compensation: Employees may deduct qualified overtime pay reported on Form W-2 or Form 1099.
Employers and payors are required under OBBB to file information returns with the IRS (or SSA for W-2s) and provide payee statements showing:
Total cash tips received and the occupation of the tip recipient.
Total qualified overtime compensation paid during the year.
Purpose of the Transition Relief
Treasury and the IRS recognize that employers and payors:
May lack systems or data to separately track tips and overtime at the level required by OBBB.
Cannot update payroll and reporting software to comply for 2025.
Will not have updated IRS or SSA forms available to reflect new data fields.
Accordingly, tax year 2025 is designated as a transition period for compliance and enforcement.
Encouraged (but Not Required) Actions for 2025
The IRS encourages, but does not require, employers and payors to:
Provide employees with occupation codes and a separate accounting of cash tips so that employees can claim the deduction for qualified tips.
Provide employees with separate accounting of overtime compensation to support the deduction for qualified overtime pay.
Deliver this information through an online portal, supplemental written statements, or secure electronic delivery. Employers may also use Box 14 of Form W-2 for overtime details.
Administrative Outlook
Employers should prepare payroll and HR systems for expanded reporting in tax year 2026.
Taxpayers will receive future IRS guidance on how to claim deductions for qualified tips and overtime.
The transition year allows employers to test reporting methods without risk of penalties.
IRS enforcement of OBBB reporting will begin after 2025 once forms and systems are updated.
Practical Impact
For tax year 2025, employers and payors are protected from penalties for failing to separately report cash tips or overtime pay under the OBBB, provided other reporting obligations are met.
The Takeaway
Tax year 2025 serves as a transition period for implementing the new OBBB reporting requirements. Employers and payors have penalty relief but are encouraged to start gathering data to support full compliance in 2026.