Alert

IRS Provides Penalty Relief for Information Reporting for No Tax on Tips and Overtime Pay

November 6, 2025

In Notice 2025-62, the Internal Revenue Service (IRS) announced on November 5, 2025 that it will provide penalty relief for taxable year 2025 for implementation of new information reporting requirements related to the deductions for qualified tips and qualified overtime compensation.

Additional guidance that addresses how individual taxpayers can claim the deductions for qualified tips and qualified overtime compensation when they file their taxable year 2025 returns is forthcoming, according to the IRS.

Effective for tax years 2025 through 2028, the One Big Beautiful Bill (OBBB) amended the Internal Revenue Code to provide a limited deduction for qualified tips and qualified overtime compensation.  For a discussion of these new provisions see “Tax Deductions on Tips and Overtime Under Trump Tax Plan,”  “Podcast: ‘Big, Beautiful’ Changes, Pt. 1: No Tax on Tips,” and “Podcast: ‘Big, Beautiful’ Changes, Pt. 2: No Tax on Overtime.”

Who is eligible for deductions?

To be eligible for deduction, the qualified tips must be included on a statement furnished to the employee or self-employed individual (Form W-2 or 1099) or reported by the individual on Form 4137. An individual is not eligible to claim the tip deduction if the individual is not furnished such a statement. The statement must separately account for amounts reasonably designated as cash tips and the occupation of the person receiving such tips. (Only tips received in certain occupations are eligible for the deduction.)

Similarly, to be eligible for the deduction on qualified overtime compensation, the qualified overtime compensation must be included on a statement furnished to the individual by the payor.

What must employers provide?

The statements containing a separate account for qualified tips or qualified overtime compensation must be provided to the individual by January 31 of the year following the year in which the qualified tips or qualified overtime compensation was received. Penalties apply if the statement does not contain the required information or is not timely furnished to the individual or filed with the IRS. One penalty is imposed if the statement does not contain all the required information or is not timely furnished to the employee or self-employed individual, and another penalty applies if the statement does not contain all the required information or is not timely filed with the IRS. The relief from these penalties is being provided because:

“Treasury and IRS are aware that employers and other payors may not currently have the information required to be reported under the OBBB, or the systems or procedures in place to be able to correctly file the additional information with IRS, or SSA [Social Security Administration] in the case of a Form W-2, and provide it to employees and other payees.” 

Another factor contributing to the relief from penalties is that the IRS will not be updating Forms W-2 and 1099 for tax year 2025 for the OBBB-related changes.

What relief is offered this year?

It is important to note that the relief does not relieve employers and other payors of their current obligation to furnish and file information returns (Forms W-2 or 1099). Rather, the relief focuses on the information that must be provided to employees and self-employed individuals.

For qualified tips, the penalty will not be imposed if the information return fails to provide on that return a separate accounting for any such amounts reasonably designated as cash tips or the occupation of the person receiving such tips. Similarly, for qualified overtime compensation, the penalty will not be imposed if the information return fails to provide on that return a statement of the total amount of qualified overtime compensation.

Providing Separate Accounting

While penalties will not be imposed if the qualified tip and qualified overtime compensation amounts are not separately accounted for on the information returns, the IRS encourages employers and payors to provide employees with a separate accounting of these amounts.

• Qualified Tips. For qualified tips, employers and payors can make such information available to their employees and payees through an online portal, additional written statements furnished to the employees or payees, or other secure methods. In addition to providing the employee or payee with the occupation code and separate accounting of cash tips, the information provided should include information regarding whether the employer’s or payor’s trade or business is a “specified service trade or business,” as defined in IRC § 199A(d)(2), for which the deduction for qualified tips is not available.
• Qualified Overtime Compensation. For qualified overtime compensation, employers and payors can make such information available to their employees and payees by including such information in box 14 of the employee’s Form W-2, or through other secured methods.