Employers will get some relief in 2025 on reporting requirements for tips (and overtime).
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The IRS has released new guidance to help employers and other payers navigate reporting requirements for cash tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA). The guidance provides penalty relief from the new information reporting requirements related to the new deduction—specifically, employers and other payers will not be penalized for failing to file correct information returns or providing correct payee statements to employees and other payees in 2025 for purposes of the deductions.
What Does The New Guidance Say?
Typically, employers and payers are subject to penalties under sections 6721 and 6722 for failure to file information forms—those are forms like Form W-2 and Form 1099 that must be provided to employees and workers, typically by January 31 following the tax year. The new deductions for tips and overtime mean are only available for income reported on those information returns. The problem? That could be challenging.
Fortunately, under the new guidance, employers and other payers will not face penalties for failing to provide a separate accounting of any amounts reasonably designated as cash tips or the occupation of the person receiving such tips. Additionally, employers and other payers will not face penalties for failing to separately report the total amount of qualified overtime compensation.
The relief applies only to returns and statements filed for the 2025 tax year and only if the person required to file a complete and correct return or statement does so.
As An Employer, Can I Report More Information Than Is Required?
Yes, the IRS says that employers and other payers are encouraged to provide employees and payees, especially those in tipped occupations, with the occupation codes and separate records of cash tips so they can claim the deduction for qualified tips in tax year 2025. Additionally, employers and payers are encouraged to supply separate records of overtime pay, ensuring employees and payees have the necessary information to claim the deduction for qualified overtime compensation for 2025.
Employers can share this information through an online portal, written statements, other secure methods, or, for overtime pay, in Box 14 of the employee’s Form W-2.
Why Is The IRS Offering Relief For 2025?
The relief was expected for a few reasons. First, Form W-2 currently doesn’t require certain types of income, such as overtime, to be reported separately. To switch gears this late in the tax year would be overwhelming for businesses and the IRS—that’s why the IRS had previously announced that Forms W-2 and 1099 for tax year 2025 will not be updated to account for OBBBA.
What About 2026?
While tax year 2025 will be treated as a transition period for IRS enforcement and administration of the new information reporting requirements for cash tips and qualified overtime compensation under OBBBA, reporting requirements will be different for 2026. Notably, Form W-2 will be updated for 2026.
What Is No Tax On Tips?
Under OBBBA, tip income is temporarily deductible—only for tax years 2025 through 2028—for taxpayers in traditionally and customarily tipped industries, regardless of whether they itemize.
The new deduction is available to taxpayers who receive qualified tips in occupations listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024 (you can see the first draft of the list from Treasury here, and you can read more about the proposed Regs here). Qualified tips are voluntary cash or charged tips (meaning those made by credit card) received from customers or through tip sharing.
The maximum annual deduction is $25,000, and the deduction for self-employed taxpayers may not exceed your net income before the deduction from the trade or business in which the tips were earned. You must include your Social Security Number on the return and file jointly if married to claim the deduction. The deduction phases out with modified adjusted gross income over $150,000 ($300,000 for joint filers).
The deduction applies to employees and self-employed individuals, and qualified tips must be reported on Form W-2, Form 1099, or other specified statement furnished to the taxpayer or reported directly on Form 4137, Social Security and Medicare Tax On Unreported Tip Income. Self-employed individuals in a Specified Service Trade or Business (SSTB) under section 199A are not eligible—the same is true for employees whose employer is in an SSTB.
What Are The New Reporting Requirements For No Tax On Tips?
Certain employees and self-employed individuals who receive qualified tips may deduct those tips if they are reported on a Form W-2, Form 1099, or reported directly by the individual on Form 4137. Generally, employers and other payers must file information returns with the IRS or SSA in the case of Form W-2, and provide statements to taxpayers showing certain cash tips received during the year and the tip recipient’s occupation (subject to the transition relief for 2025).
What Is No Tax On Overtime?
Workers who receive overtime will be eligible for a deduction for qualified overtime pay of $12,500 ($25,000 for married taxpayers filing jointly). As with tips, this is a deduction, not an exclusion.
The new deduction is effective for 2025 through 2028 for taxpayers who receive qualified overtime compensation—it can be claimed regardless of whether you itemize your deductions. The deductible amount is the bit that exceeds your regular rate of pay—the “half” portion of “time-and-a-half” compensation. Overtime pay must be reported on a Form W-2, Form 1099, or another specified statement furnished to the taxpayer.
You must include your Social Security Number on the return and file jointly if married to claim the deduction. The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over $150,000 ($300,000 for joint filers).
What Are The New Reporting Requirements For 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. Again, employers and other payers are required to file information returns with the IRS or the SSA, as applicable, and to provide statements to taxpayers showing the total amount of qualified overtime compensation paid during the year (subject to the transition relief for 2025).
Where Can I Find The Guidance?
Notice 2025-62 provides penalty relief from the new information reporting requirements for cash tips and qualified overtime compensation under OBBBA to employers and other payers for failing to file correct information returns and to provide correct payee statements to employees and other payees.
What’s Next For Taxpayers
The deductions for tips and overtime are two of four new deductions under OBBBA that are largely referred to by the administration by their popular monikers: No Tax on Tips, No Tax on Overtime, No Tax on Car Loan Interest, and No Tax on Social Security.
You’ll report the deduction (or deductions) alongside those other OBBBA deductions on a new Schedule 1-A, Additional Deductions, when you file your 2025 tax return in 2026. The final version of Schedule 1-A hasn’t been released yet, but you can take a look at the draft version here.
The IRS has indicated that they will issue additional guidance for individual taxpayers on how to claim deductions for qualified tips and qualified overtime compensation when they file their 2025 tax returns.
There’s more information to come on OBBBA, so check back with Forbes. To keep it easy, I recommend that you subscribe to our free tax newsletter—that way, the information you need will land in your email inbox each Saturday morning with no additional work on your part.