Tax insight

IRS provides 2025 penalty relief for reporting on qualified tips and overtime

Insight
5 minute read
November 24, 2025

What happened?

Employers and payors have been granted penalty relief for calendar year 2025 associated with information returns related to qualified tips and overtime compensation. Under the One Big Beautiful Bill Act (the Act), employees and payees may temporarily deduct qualified tips and overtime compensation for federal income tax purposes. Notably, on November 5, the IRS issued Notice 2025-62, announcing that penalties will not be imposed for failing to file correct information returns or furnish correct statements for calendar year 2025, as required by the Act.

Why is it relevant?

Pursuant to Notice 2025-62, employers and payors will not face penalties for failing to provide a separate accounting of any amounts reasonably designated as “qualified tips” or identifying the occupation of the person receiving those tips. In addition, employers and payors also will not face penalties for failing to separately provide the total amount of “qualified overtime compensation.” The relief is limited to information returns and statements filed and furnished for calendar year 2025 and applies only to the extent that the person required to make the return or statement otherwise files and provides complete and correct information returns or statements currently required, notwithstanding the new provisions of the Act.

Actions to consider 

The IRS will treat calendar year 2025 as a transition period for enforcement and administration of these new information reporting requirements. Forms W-2, Wage and Tax Statement, and applicable Forms 1099 (e.g., Form 1099-MISC, Form 1099-NEC, and Form 1099-K) for tax year 2025 will not be updated for these changes. Employers and payors should use this transition period to update their systems, develop communications to alert employees and payees of forthcoming changes in reporting, and put in place procedures to be able to identify and track the additional information required to be provided to employees and other payees and reported under the Act with the IRS and, as applicable, the Social Security Administration (SSA).

Observation: The IRS has published drafts of the 2026 Forms W-2, 1099-K, 1099-MISC, and 1099-NEC. Draft instructions have not been published. Each draft form includes extra fields and instructions for payees and payors to provide details needed for taxpayers to deduct qualified cash tips and overtime. Filers should examine the draft forms to prepare for 2026 reporting requirements.

Observation: On November 21, the IRS issued Notice 2025-69 providing guidance to individual taxpayers who are eligible for federal income tax deductions for qualified tips or qualified overtime compensation The notice clarifies how workers should determine the amount of their deduction without receiving a separate accounting from their employer for cash tips or qualified overtime on information returns such as Form W-2 or Form 1099, as those forms remain unchanged for the current tax year.