Nonprofit Resources
Treasury and IRS Announce 2025 Penalty Relief for Employer Reporting of Overtime Pay and Tips
The U.S. Department of the Treasury and the IRS have announced penalty relief for tax year 2025 related to the new reporting requirements for qualified overtime compensation and cash tips. These requirements were enacted in the One Big Beautiful Bill Act (OBBBA) in July 2025.
What Employers Need to Know
The OBBBA added a limited deduction for overtime pay and tips for tax years 2025 through 2028. Under the new provision, during this time:
- Certain individuals may deduct qualified overtime compensation reported on Form W-2 or Form 1099. Employers must report the total amount of qualified overtime compensation paid during the year.
- Certain employees and self-employed individuals may deduct qualified tips reported on Form W-2, Form 1099, or directly reported by the individual on Form 4137. Employers must file information returns and provide employees with statements showing the occupation of the tip recipient and certain cash tips received during the year.
Because employers and other payors may not yet have the required information or systems to meet the reporting requirements, and because Forms W-2 and 1099 for tax year 2025 will not be updated to reflect the OBBBA-related changes, the IRS will treat 2025 as a transition period for these requirements.
As outlined in IRS Notice 2025-62, no penalties will be assessed for failure to:
- Separately report the total amount of qualified overtime compensation.
- Separately report amounts reasonably designated as cash tips or the occupation of the individual receiving these tips.
This relief applies only to returns and statements (i.e., Forms W-2 and 1099) filed and provided for tax year 2025, as long as the rest of the return or statement is otherwise complete and accurate.
Additional IRS Guidance on Reporting Occupation
The IRS also recently issued guidance listing occupations in which tips are a customary component of employee compensation. The proposed regulations list almost 70 occupations of tipped workers.
Next Steps
To learn more about the overtime pay and tip deductions, along with other key provisions in the OBBBA, read our article highlighting how the new law impacts nonprofits. We’ll also discuss the OBBBA and other tax updates during our free 2025 Nonprofit Tax Year-End Review webinar on Thursday, December 11, at 2 p.m. CT. Reserve your spot today.
Please contact us with any questions.