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On November 5th, 2025, the Department of the Treasury (DOT) and the Internal Revenue Service (IRS) issued guidance involving tip and overtime information reporting and penalties. Specifically, the guidance explains reporting penalty relief that will be available to employers and other payors for tax year 2025. Presently, the relief involves the reporting of cash tips and qualified overtime information under the One Big Beautiful Bill (OBBB). Earlier, in October 2025, the IRS released multiple Frequently Asked Questions (FAQs) to guide employers on any questions they may have regarding new responsibilities they have under the OBBB.
What Is the Penalty Relief for Tax Year 2025?
Significantly, the two federal agencies created a single resource to explain the relief being offered. In brief, Notice 2025-62 explains how any new tip and overtime information reporting done incorrectly may not be penalized. Markedly, this reporting includes new requirements for cash tips and qualified overtime compensation under the OBBB. Under the Notice, employers and other payors will not be penalized for not filing correct information returns or providing incorrect payee statements to employees and other payees.
Chiefly, employers and other payors will not face penalties for failing to provide a separate accounting of specific amounts. Such amounts include those designated as cash tips or the occupation of the person receiving such tips. Additionally, employers and other payors will not face penalties for separately failing to provide the total amount of qualified overtime information. However, it is important to note that this penalty relief is limited to returns and statements filed and provided for tax year 2025. Also, it only applies if the person making the return or statement files and provides a complete and accurate return or statement.
What Are the New Reporting Requirements Under the OBBB?
The new tip and overtime information requirements fall under two different regulations: “No Tax on Tips” and “No Tax on Overtime.” The following are explanations of each, as noted by the IRS:
- No Tax on Tips – Certain employees and self-employed individuals who receive qualified tips may deduct qualified tips that are reported on a Form W-2, Form 1099, or reported directly by the individual on Form 4137. Employers and other payors must file information returns with the IRS or the Social Security Administration (SSA), in the case of Form W-2, and provide statements to taxpayers showing the cash tips received during the year and the occupation of the tip recipient.
- No Tax on Overtime – Certain individuals who receive qualified overtime compensation may deduct the qualified overtime compensation that is reported on a Form W-2 or Form 1099. Employers and other payors are required to file information returns with the IRS or the SSA, in the case of Form W-2, and provide statements to taxpayers showing the total amount of qualified overtime compensation paid during the year.
Why Was the Penalty Relief on Tip and Overtime Information Reporting Created?
Since the OBBB was signed only a matter of months ago, the end of Tax Year 2025 occurs in less than two months, the DOT and the IRS felt that some relief was needed. Henceforth, the federal agencies stated that they were aware that employers and other payors may not currently have the information required to be reported under the OBBB. Businesses may also lack the necessary systems or procedures to accurately file the additional information with the IRS and provide it to employees and other payees.
Furthermore, the IRS has previously announced that Forms W-2 and 1099 for tax year 2025 will not be updated to reflect the OBBB-related changes. Therefore, tax year 2025 will be treated as a transition period for IRS enforcement and administration of the new OBBB rules.
Employer Takeaways
In conclusion, although the two federal agencies created Notice 2025-62 informing businesses of the penalty relief, they still encourage employers to provide affected individuals with important information. This information could include separate accountings of cash tips and overtime information. Finally, as mentioned earlier, 2025 will be treated as a transitional tax year. For all intents and purposes, tax year 2026 will not include relief for tip and overtime information reporting. Over the course of the next year, all employers should be prepared to comply with the requirements of the OBBB. Failure to do so could result in fines and penalties that have not yet been announced.
