IRS Offers 2025 Relief on Tip and Overtime Reporting Penalties

Last Wednesday, the Internal Revenue Service (IRS) issued Notice 2025-62, offering partial penalty relief for employers navigating new reporting requirements under the “One Big Beautiful Bill” (OBBB) tax reform passed during the Trump administration. The policy provides a transition window for businesses to adjust internal systems and mitigate compliance stress during implementation.

If you or your business have questions regarding employment tax compliance or reporting procedures, please contact the ILS legal team at contact@consultils.com. We offer clear, strategic legal solutions to help you effectively manage employment-related risks and maintain full compliance.

Key Provision

Under OBBB, beginning with the 2025 tax year, employees may deduct tips and qualifying overtime compensation from personal income tax. In support of this policy, employers are now expected to include the following additional details in their annual information returns:

• Total amount of cash tips

• Job classification codes of tipped employees

• Total amount of qualifying overtime compensation

However, recognizing that most employers may not have systems ready for this level of reporting, the IRS clarified:

• This penalty relief applies only for tax year 2025

• Employers are strongly encouraged to voluntarily provide detailed information (e.g., cash tips, overtime amounts, job codes) to employees via online platforms, written statements, or Box 14 of Form W-2

• If an employer correctly reports the core fields—total amount, employee name, and address—but fails to separately report the new data fields, no penalty will be imposed for 2025

What This Means for Employers

• Short-Term Risk Relief: 2025 will serve as a grace period. Employers will not be penalized for missing detailed fields (cash tips, job codes, qualifying overtime) as long as core data is accurate. This significantly reduces compliance pressure in the first year.

• Clear Long-Term Expectations: Starting in 2026, detailed reporting will be strictly enforced. Industries with frequent tip or overtime payments—such as hospitality, food service, and personal care—must proactively prepare.

• Reputation & Compliance Boost: Even in 2025, employers who voluntarily share complete data with employees may build trust, reduce disputes, and help employees claim deductions—enhancing overall tax and labor compliance.

Recommended Actions for Employers

Despite the temporary penalty relief, employers should begin preparing now:

• Monitor Future Guidance: Closely track further updates from the IRS and U.S. Treasury regarding employee deduction procedures, definitions of tipped positions, and standards for calculating qualifying overtime compensation.

• Assess Current State: Immediately evaluate whether your company is involved in paying cash tips or qualifying overtime, and review whether your existing systems (e.g., tip tracking, overtime logs, job classification codes) can support the required data collection.

• Plan for System Upgrades (2026 Deadline): Develop a roadmap to update your payroll and HR systems before 2026, including:

  • Adding data fields for cash tip amount, job classification code, and qualifying overtime compensation.

  • Defining and coding positions that “customarily and regularly receive tips.”

  • Communicating future reporting requirements to payroll, finance, and third-party vendors.

• Inform Employees Proactively: In 2025, consider voluntarily providing employees with their total cash tip amount, overtime compensation, and job classification code—delivered through online platforms, written reports, or annotated in Box 14 of the W-2 form

• Maintain Documentation: Archive your system upgrade plans, data collection processes, and employee notifications—along with corresponding timelines—to support potential future compliance reviews or audits.

• Train Key Personnel: conduct targeted training for HR, payroll, and finance teams to ensure full understanding of the new reporting obligations and their long-term impact.

The temporary penalty relief from the IRS provides employers with a critical buffer as they adapt to new tip and overtime reporting requirements under the OBBB tax law. Businesses should take full advantage of this transition period to streamline internal processes, strengthen compliance systems, and closely monitor future tax guidance. Where needed, seeking professional support can help ensure end-to-end compliance and equip employers to confidently navigate evolving employment tax challenges.

If you or your business have questions regarding employment tax compliance or reporting procedures, please contact the ILS legal team at contact@consultils.com. We offer clear, strategic legal solutions to help you effectively manage employment-related risks and maintain full compliance.

Disclaimer: The materials provided on this website are for general informational purposes only and do not, and are not intended to, constitute legal advice. You should not act or refrain from acting based on any information provided here. Please consult with your own legal counsel regarding your specific situation and legal questions.

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As Managing Partner at ILS, Richard Liu ranks among the leading U.S. attorneys in corporate, employment, and regulatory law. He is known for crafting legal strategies aligned with clients’ business objectives and advising Fortune 500 companies, startups, and executives on corporate transactions, financing, privacy, and employment matters across the technology, healthcare, and financial sectors.

Before founding ILS, Richard practiced at top defense firms, where he developed a reputation for anticipating risks and designing strategies that balance protection with growth. He has secured favorable outcomes in contract and intellectual property disputes, represented clients in state and federal courts, and is recognized for combining large-firm expertise with boutique-firm agility. Richard is also a frequent speaker at industry and legal conferences.

Email: contact@consultils.com | Phone: 626-344-8949