OBBBA Changes Everything: New Reporting Rules for Tips and Overtime
Does your business employ individuals who receive tips or overtime pay? Do you make payments to self-employed individuals that include tips? If so, are you aware that under the One Big Beautiful Bill Act (OBBBA) those employees or payees will be able to deduct tips and certain overtime wages beginning in 2025, and that your business is now obligated to follow new IRS reporting requirements or face penalties for failure to do so? If you’re not aware, we’re here to help navigate the new reporting requirements under OBBBA, and to understand some recent guidance and penalty relief issued by the IRS.
Prior to the OBBBA, employees or self-employed individuals who received tips or were paid overtime were required to report those amounts as income. Under generally applicable federal tax law, employers and payers must report those payments on the applicable information forms, such as Form W-2 or Form 1099. Failure to file the applicable information return and provide a copy to the employee or payee could result in penalties under IRS Code Sections 6721 and 6722.
So, what has changed under the OBBBA? For one, individuals who are tipped or who receive qualified overtime will be able to deduct those amounts from income for tax years 2025 through 2028. If that sounds like a tax return issue for individuals and not a business issue, keep reading.
The catch for businesses is that the new deductions for tips and overtime for individuals are only available for income that is reported by the employer or payee. This means that your business will still prepare and file the applicable information returns, such as a W-2 or 1099, but there will be changes to those forms and businesses will have to report more detailed information for tax years 2025 through 2028. For example, employers and payers will be required to identify applicable occupation codes and to provide separate accounting on the forms for tips or qualified overtime compensation.
Although the new reporting requirements go into effect in 2025, the good news is that the IRS has recognized that it will be difficult for business to comply with the new requirements in 2025. Specifically, Form W-2 and Form 1099 have not yet been updated to reflect the new requirements. The IRS has realized it would be virtually impossible for the IRS and taxpayers to change course so late into 2025. Accordingly, the IRS issued Notice 2025-62, which contains detailed information about the reporting requirements and provides for penalty relief for failure to follow the requirements in 2025.
In short, Notice 2025-62 provides that employers and other payers will not face penalties for the failure to comply with the new OBBBA reporting requirements in 2025. This relief, however, will only apply to returns and statements filed for the 2025 tax year and only if the party that is required to file the applicable information return does so.
Even though taxpayers will not be subject to penalties for failure to follow the new reporting requirements in 2025, the IRS is encouraging employers and payers to provide employees and payees with the occupation codes and separate records of cash tips or overtime pay so that the employee or payee can claim the deduction in tax year 2025. For 2025, your business can provide information regarding tips through an online portal, written statements, or other secure methods. For overtime pay, your business can use the same methods or can report the information in Box 14 of the employee’s Form W-2.
In summary, the OBBBA imposes new reporting requirements on employers and payers with respect to tips and overtime compensation. Although the IRS will treat tax year 2025 as a transition year, the applicable forms will be updated, and employers and payers will be obligated to follow the new reporting requirements for 2026 through 2028 or face penalties. If you need assistance with any of these new reporting rules please reach out to any member of our Corporate and Tax Team.
