IRS offers penalty relief for 2025 tip and overtime reporting requirements

ARTICLE | November 06, 2025

Authored by RSM US LLP

Executive summary: IRS relief gives businesses time to meet new tip and overtime tax rules

Employers and payors now have breathing room to comply with new reporting rules for tips and overtime compensation. The IRS has announced penalty relief for the 2025 tax year, giving businesses time to adjust systems and processes before enforcement begins.

Under the One Big Beautiful Bill Act (OBBBA), workers in tipped occupations and those earning overtime may qualify for new deductions—up to $25,000 for tips and $12,500 ($25,000 joint) for overtime. While the law requires separate reporting of these amounts and occupation codes, the IRS will not penalize businesses in 2025 for failing to do so, provided other reporting requirements are met.

Employers are encouraged to begin tracking and communicating this information to help workers claim deductions. Additional guidance for individual taxpayers is expected.

Businesses won’t be penalized in 2025 for failing to separately report qualified tips, overtime compensation or occupation codes under new rules introduced by OBBBA. The IRS has designated 2025 as a transition year, offering relief as employers and payors work to update payroll systems and reporting processes. The IRS provided this transition guidance in Notice 2025-62 on Nov. 5, 2025.

Background: OBBBA and “No tax on tips” and “No tax on overtime”

OBBBA, signed into law on July 4, 2025, introduced sweeping changes to the Internal Revenue Code, including “No tax on tips” and “No tax on overtime’ provisions effective for tax years 2025 through 2028.

Specifically, OBBBA amended the tax code to authorize employees and self-employed individuals in certain tipped occupations to deduct up to $25,000 of qualified tips annually, and individuals earning overtime pay to deduct up to $12,500 ($25,000 joint) of qualified overtime pay. These deductions are taken on the employees’ own federal income tax returns (e.g., Forms 1040), subject to income phaseouts and other eligibility criteria and are available to both itemizers and non-itemizers.

Under these new rules, employers, payors, and payment settlement entities are required to separately report qualified tips and qualified overtime compensation, as well as the occupation of a taxpayer earning qualified tips, on information returns and payee statements (e.g., Forms W-2, 1099, and 1099-K). These new reporting requirements are effective for payments made in 2025.

In September 2025, the IRS issued proposed regulations on the qualified tips provision, listing nearly 70 tip-eligible occupations and defining qualified tips. Separately, the IRS acknowledged that changing payroll and software systems to accommodate the required reporting for amounts paid in 2025 would be very challenging. The agency signaled that transition relief would be provided for 2025 for businesses subjected to the new reporting requirements and for taxpayers that would be claiming deductions.

No tax on tips or overtime: Notice 2025-62 provides penalty relief for 2025 reporting

IRS Notice 2025-62 provides relief from penalties under sections 6721 and 6722 for failures to comply with the new information reporting requirements for qualified tips and qualified overtime compensation for the 2025 tax year.

Key points from Notice 2025-62 include:

• Scope of relief: For 2025, the IRS will not impose penalties on employers, payors, or payment settlement entities that fail to separately report qualified tips, qualified overtime compensation, or occupation codes on required information returns or payee statements, provided that the business otherwise files and furnishes a complete and correct return or statement.
• Transition year: The notice provides that 2025 will be regarded as a transition year for enforcement and administration.
• Encouragement, but no requirement: While not required for penalty relief, the IRS specifically encourages employers and payors to provide their employees and payees with as much information as possible, such as occupation codes and separate tip/overtime amounts, through alternative means, including Box 14 of Form W-2, supplemental statements, or online portals, to help individuals claim the new deductions.
• Additional taxpayer guidance: The IRS will issue additional guidance for individual taxpayers on how to claim the deductions for qualified tips and overtime compensation on their 2025 returns.

Takeaways: Penalty relief for new tax reporting rules for tips and overtime

OBBBA’s “No tax on tips” and “No tax on overtime” provisions offer new deductions for many workers, but they also create new reporting obligations for employers and payors. For 2025, the IRS is providing a transition period with penalty relief, recognizing the practical challenges of immediate compliance.

Employers and payors are encouraged to track and communicate qualified tip and qualified overtime compensation information but will not face penalties for failing to separately report these amounts or occupation codes for 2025.

Additional guidance for individual taxpayers that addresses the deductions for qualified tips and qualified overtime compensation with respect to 2025 income tax returns is forthcoming.

Please connect with your advisor if you have any questions about this article.