The IRS has offered broad relief (Notice 2025-62) from penalties that would otherwise be imposed on employers for failing to accurately report tips and overtime pay for calendar year 2025 under the One Big Beautiful Bill Act (OBBBA).
Although the IRS is not imposing penalties for reporting failures, employers are likely to face pressure from their workforce to provide the information that employees will need to claim those deductions on their 2025 Forms 1040. The issue will be prevalent in industries where tips or overtime are common, such as hospitality and manufacturing.
The new reporting requirements relate to the individual deductions created by the OBBBA for qualified overtime compensation and qualified tip income, effective from 2025 through 2028 (see BDO’s summary of these OBBBA changes: OBBBA Introduces Key Payroll & Employee Benefits Changes). To facilitate the deductions, the legislation requires taxpayers to report to the IRS and to their workers new information on the total amount of qualified tips and qualified overtime compensation earned by employees and independent contractors.
Qualified overtime pay is generally pay in excess of the regular rate of pay under the federal Fair Labor Standards Act (the “half” in “time-and-a-half”). Qualified tip income generally includes voluntary tips in occupations that ordinarily and customarily received tips before 2025, as determined by the IRS. Eligibility for both deductions is subject to income thresholds and other important rules.
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Taxpayers will have to make several determinations at the entity level to determine if workers qualify for the tip deduction, including whether the business is a disqualified specified service trade or business under Section 199A, whether tips are considered voluntary for customers, and whether the employee or independent contractor receives the tips in a qualifying occupation. The IRS has issued proposed regulations (REG-110032-25) to provide guidance on these rules, including a list of qualifying occupations (see BDO’s alert (IRS Lists Jobs that Qualify for OBBBA’s “No Tax on Tips”) for more information).
The OBBBA adds new reporting requirements related to the tip and overtime deductions for Form W-2 and Form 1099-NEC, as well as the associated statements that must be furnished to recipients. Taxpayers must now separately state any qualified overtime pay and cash tips, as well as identify the qualified occupation in which any cash tips were received.
The IRS acknowledged in the new guidance that taxpayers may not have the systems or procedures in place to collect the necessary information and perform the reporting for 2025. Notice 2025-62 provides that the IRS will not impose any penalties for failing to include any of the newly required information on either recipient statements or IRS forms for the 2025 tax year. To be eligible, taxpayers must otherwise file and furnish accurate returns and statements.
The IRS said taxpayers are still “encouraged” to provide employees and payees the information they will need to claim the deductions through an online portal, additional written statements, or other secure methods.
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Taxpayers with employees who receive overtime or tip compensation should consider what information they would like to provide to their workforce voluntarily. They may wish to prepare a communication plan to address employee questions. Employees are likely to request information to help them claim the deductions on their returns. There may also be questions regarding the allocated tips reported in Box 8 of the 2025 Form W-2, which is already required and for which there is no new penalty relief.
Taxpayers may consider several options for providing voluntary information to employees. The IRS has released a draft 2026 Form W-2 that divides Box 14 into 14a and 14b, with 14b designated for reporting tipped occupations. The draft instructions indicate that the IRS is currently planning for employers to report tips and overtime in Box 12 under new codes “TP” for qualified tips and “TT” for qualified overtime compensation. These designations are not provided on the 2025 forms, however, and the IRS suggested that taxpayers could instead use Box 14, “Other,” on the 2025 Form W-2 to report overtime compensation. Taxpayers could also provide supplementary statements or allow employees to access the information through an online portal or account.
Please visit BDO’s Global Employer Services page for more information on how BDO can help.