New Reporting Requirements
Beginning in Tax Year 2025 under the One, Big, Beautiful Bill Act, employers and other payors are required to:
- Report cash tips separately on information returns, including occupation of the tip recipient. (irs.gov)
- Provide statements to employees/payees showing amounts of qualified tips received ■ and
- Report qualified overtime compensation separately. (irs.gov)
Forms W-2 and 1099 will need to include this new breakdown—even though the forms are not yet redesigned for 2025. You may need to attach data via an additional statement or other reporting mechanism. (irs.gov)
Penalty Relief Transition for 2025
To ease into the new system, the IRS has provided penalty relief for 2025 for failure to properly report cash tips or overtime compensation—if you file a complete, correct return otherwise. (irs.gov) This includes:
- No penalties for failing to provide separate accounting of tips or occupation
- No penalties for not separately showing overtime compensation
Employer Action Plan
Audit your payroll and systems
Review payroll systems to determine whether they currently collect or can be modified to collect:
- Occupation codes for tipped workers
- Breakdown between base pay, tips, overtime hours/pay
Train your payroll professionals
Ensure your HR and payroll teams understand the new definitions:
- What qualifies as “qualified overtime compensation” under OBBB
- What qualifies as “cash tips” and when a tip is a reportable amount
Document everything
Even though penalty relief is available, keep all documentation in case of future audits. Retain:
- Employee occupation records
- Time sheets or overtime agreements
- Employer’s internal tip allocation policies and income records
Communication with workers
Provide separate statements or notices to employees showing tips and overtime income—even if not yet required on standard forms. Transparency helps employees file accurately. It also protects employers from misclassification disputes.
Example Scenario
Suppose Alice owns a restaurant. Under OBBB, she must report cash tips and show her servers’ occupations—even though the W-2 form hasn’t been redesigned yet. She should:
- Begin collecting occupation titles and tip amounts now, using her payroll software or written documentation.
- Provide a separate statement accompanying pay stub or year-end summary.
- File 2025 information returns with the extra detail as best as possible—or with statements as required—to avoid future penalties.
Summary Checklist
| Task | Action | Deadline/Notes |
|---|---|---|
| Review payroll systems | Can current system capture occupation, tips, overtime breakdown | Now—do not wait until year-end |
| Train staff | Clarify roles and ensure consistent data collection | Fall 2025 |
| Prepare statements | Ensure employees get occupation and tips/overtime detail | End of tax year 2025 |
| File complete returns | With correct totals and statements | Early 2026, when submitting returns/statements |
Bottom line: Take advantage of the penalty relief in 2025 to prepare robust systems and processes. Starting early will reduce risk when full enforcement begins.