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The IRS recently provided temporary penalty relief for the new qualified tips and overtime reporting requirements created by the One Big Beautiful Bill Act (OBBBA).
This relief (Notice 2025-62) only applies to payments made in calendar year 2025, and only to the extent that the person required to make the return or statement otherwise files and furnishes a complete and correct return or statement. For this purpose, the notice provides clarification on what constitutes a complete return or statement in order to qualify for the penalty relief.
The OBBBA allows individuals an above-the-line deduction on their Forms 1040 for “qualified tips” and “qualified overtime compensation” received in the 2025-2028 calendar years, subject to certain limitations and phaseouts. The new law also requires service recipients (e.g., employers) to separately report the amount of qualified tips (in addition to specified occupation details) and qualified overtime compensation to workers on a Form W-2 or 1099-NEC, as applicable. This is a significant shift from prior reporting practices, where tips were generally aggregated with wages on Forms W-2 or 1099 without occupation details.
A qualified tip is an amount paid in cash or by charge card to an individual in an occupation which traditionally receives tips, as long as the tip is voluntary. Service charges and automatic tips do not appear to be qualified tips. Qualified overtime compensation is defined as overtime compensation required under Section 7 of the Fair Labor Standards Act (FLSA) that is in excess of the individual’s regular rate of pay (i.e., only the overtime premium appears to be qualified overtime compensation).
Because of this, the agency granted penalty relief for 2025 to ease the transition. However, if reporting is incomplete or incorrect beyond the new tip and occupation details, the relief does not apply.
The notice also provides that, while not a requirement to receive the penalty relief, employers are encouraged to provide employees with separate accountings of cash tips (and occupation codes) and overtime compensation so that employees have the information they need to determine whether they can claim one or both deductions for taxable year 2025. In addition, with respect to cash tips, the IRS encouraged employers to provide employees with information regarding whether the employer’s trade or business is a specified service trade or business as defined in Section 199A(d)(2) (e.g., health, law, accounting, performing arts, consulting, athletics, financial services). Tips received in those trades or businesses generally do not constitute qualified tips.
The notice explains that employers can make such information available to their employees through an online portal, additional written statements furnished to the employees, in the case of overtime compensation by including it in Box 14 of the employee’s Form W-2, or other secure methods.
The IRS also noted that additional guidance for individual taxpayers is forthcoming that will address how they can claim the deduction for qualified tips and qualified overtime compensation when they file their taxable year 2025 returns.
The IRS released proposed regulations for the deduction for qualified tips, but guidance related to tax benefits for overtime pay is still pending. Taxpayers may rely on the qualified tips proposed regulations for taxable years beginning after Dec. 31, 2024, and on or before the date these regulations are published as final regulations in the Federal Register, provided that taxpayers follow the proposed regulations in their entirety and in a consistent manner.
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