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IRS Offers 2025 Penalty Relief on Tip and Overtime Reporting
Tax year 2025 will serve as a transitional period for IRS administration and enforcement of the newly adopted reporting requirements for cash tips and qualified overtime.
On July 4, President Donald Trump signed the “One Big Beautiful Bill Act” (OBBB) into law. The act allows employees who regularly receive tips to deduct up to $25,000 in tips from their federal taxable income. It also allows a deduction of up to $12,500 in qualified overtime pay. These deductions will be taken on personal income tax returns. Although the IRS has announced that Form W-2 and Form 1099 for tax year 2025 will not be updated to reflect the OBBB changes, employers will need to provide cash tips and qualified overtime information in future reporting.
Penalty relief notice
On Nov. 6, 2025, the IRS issued Notice 2025-62, confirming penalty relief for employers for tax year 2025 related to the new reporting requirements for cash tips and qualified overtime compensation under the OBBB. Employers will not face penalties for failing to separately report cash tips or the occupation of workers receiving them. Employers will also avoid penalties for not separately reporting total qualified overtime compensation. The relief applies only to W-2s filed for tax year 2025 that are otherwise complete and correct.
Tax year 2025 will serve as a transitional period for IRS administration and enforcement of the new reporting requirements for cash tips and qualified overtime under the OBBB. The U.S. Treasury and the IRS noted that employers may not yet have systems or procedures in place to accurately report these items. Additional guidance is expected.
As a reminder, the deduction for cash tips and qualified overtime are available to employees on their personal tax returns. Employees with questions should be encouraged to contact their tax preparer.
Read additional information on the OBBBA tip and overtime tax provisions: