The IRS recently issued Notice 2025-62 offering important guidance and penalty relief for businesses and employers navigating new information reporting requirements introduced by the One, Big, Beautiful Bill Act (OBBBA). These changes affect how tips and overtime compensation are reported for tax year 2025. Here’s what you need to know:

Background: What Changed Under OBBBA?

The OBBBA introduced two new deductions for individuals:

• Qualified Tips – Cash tips received in occupations that customarily receive tips
• Qualified Overtime Compensation – Certain overtime wages

To support these deductions, the law added new information reporting requirements for payors, employers, and third-party settlement organizations (TPSOs). These include:

• Separate reporting of cash tips and the recipient’s occupation
• Separate reporting of qualified overtime compensation

Why Penalty Relief Matters

Normally, failure to file correct information returns or furnish accurate payee statements can trigger penalties under Sections 6721 and 6722. However, the IRS recognizes that businesses may not yet have systems in place to comply with these new rules. For tax year 2025 only, the IRS will not impose penalties if you fail to include:

• Separate accounting of cash tips or occupations on Forms 1099 or W-2
• Separate reporting of qualified overtime compensation

This relief applies only if all other required information is correctly reported.

Key Points for Employers and Payors

• Forms W-2 and 1099 will not be updated for 2025 to reflect these changes
• You are encouraged—but not required—to provide employees and payees with tip and overtime details to help them claim deductions
• Consider using Box 14 on Form W-2, online portals, or supplemental statements to share this information

Action Steps for 2025

1. Continue filing accurate returns and statements with aggregate payment amounts
2. Prepare for 2026 compliance by updating payroll and reporting systems to capture:
   • Cash tips and occupations
   • Qualified overtime compensation
3. Educate employees about potential deductions for tips and overtime

Looking Ahead

Penalty relief is temporary. Starting in 2026, failure to comply with these new reporting requirements could result in penalties. Additional guidance for individual taxpayers to address how they can claim the deductions for qualified tips and qualified overtime compensation when they file their taxable year 2025 returns is forthcoming. Now is the time to review your processes and work with your payroll provider or CPA to ensure readiness.

Need help navigating these changes?

Contact our office for guidance on compliance strategies and how to maximize deductions for your employees. Feel free to contact your H2R CPA liaison and they will be happy to assist you with any questions.

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