Understanding the 2025 Reporting Relief for Tips and Overtime

The IRS and Treasury recently announced that tax-year 2025 will serve as a transition year for the new reporting rules on cash tips and qualified overtime under the One, Big, Beautiful Bill. Employers and other payors will not face penalties in 2025 if they are unable to separately report these amounts.

The IRS explains that employers will not be penalized for failing to report amounts “reasonably designated as cash tips or the occupation of the person receiving such tips.” It also notes that payors won’t be penalized for not reporting the “total amount of qualified overtime compensation” during this transition year, however employees will be expecting the reporting in order to take the deduction on their individual returns.

Preparing for What Comes Next

Even with penalty relief in place, the IRS encourages employers to start building the right habits now. As the notice states, employers are encouraged to give workers “separate accountings of cash tips … and of overtime compensation” so establishing best practices for how to report in 2025 is encouraged while also preparing ahead of time for the 2026 required reporting.

Practical steps for 2025 may include:

• Offering employees documentation of cash tips and occupation codes/overtime premiums paid either through a separate statement or in Box 14 of their W-2.
• Setting up payroll processes that capture qualified overtime/qualified tip amounts in preparation for 2026 filing requirements.
• Reviewing internal reporting systems to anticipate future requirements of reporting using Box 12 codes for 2026 through 2028.

These habits will help smooth the shift once enforcement begins.

What Employees Should Know

The IRS notes that workers who receive qualified tips or qualified overtime may be able to deduct those amounts on their individual tax returns. Employees should expect additional instructions from the IRS in the future about how those deductions will work.

Why It Matters

Penalty relief does not remove the long-term reporting requirement. Employers should view 2025 as a reporting year, particularly if they have tipped employees or significant overtime activity. Now is the time to evaluate whether your payroll systems, reporting processes, and documentation are ready for the years ahead and what adjustments need to be made with your current systems to ensure the correct amounts are used to report qualified tips/qualified overtime for 2025.

If you’re unsure how this transition period affects your organization, Brady Martz can assist with W-2 preparation, year-end accounting support, and 1099 filings. To secure year-end help for the 2025 season, please reach out to our team by December 23, 2025.

Source:

IRS Newsroom, Treasury, IRS Provide Penalty Relief for Tax Year 2025 for Information Reporting on Tips and Overtime Under the One Big Beautiful Bill (2025).
https://www.irs.gov/newsroom/treasury-irs-provide-penalty-relief-for-tax-year-2025-for-information-reporting-on-tips-and-overtime-under-the-one-big-beautiful-bill

Disclaimer:

This article is for general informational purposes only and should not be considered tax or legal advice. Situations can vary, and requirements may change as additional IRS guidance is released. For guidance specific to your organization, please contact the qualified professionals at Brady Martz.

Elements of this article were generated with the assistance of AI-enabled drafting tools. The final version has been carefully reviewed by Brady Martz professionals to ensure it reflects our standards of quality and accuracy.