Compliance
Compliance Imperatives: Employers’ Duties in Reporting Tips & Overtime Under the OBBBA
With new information reporting rules for tips and overtime kicking in, employers must understand what’s required now versus what’s optional in 2025—and how to avoid penalties moving forward.
By NomadicTax Research Team • 5-8 min read • November 18, 2025
## New Compliance Rules for Tax Year 2025
The One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, mandates that employers and payors report the following on information returns and payee statements for tax years **2025 through 2028**:
- **Qualified tips** received by employees/contractors, including minus trade limits and SSTB exclusions.
- The **tip recipient’s occupation code** using Treasury’s specified list.
- **Qualified overtime compensation** paid to the employee.([taxnews.ey.com](https://taxnews.ey.com/news/2025-2250?utm_source=openai))
However, for **tax year 2025 only**, the IRS and Treasury have provided **transition penalty relief** if you cannot yet supply those items on Forms W-2 or 1099.([irs.gov](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?utm_source=openai))
## What 2025 Compliance Requires (vs Optional)
| Required in 2025 | Encouraged (but Voluntary) |
|--------------------------------------|--------------------------------------------------|
| Report aggregate wages and tips/overtime in total (even if detailed breakdowns are missing) | Provide separate statements identifying tips, overtime, and occupation codes |
| Timely filing of W-2s/1099s | Use online portals, extra written statements, or Box 14 of W-2 to give detailed breakdowns |
## Penalties & Relief Provisions
- **IRC Section 6721** penalties apply to incorrect information returns filed with the IRS.
- **IRC Section 6722** penalties apply to incorrect payee statements furnished to employees or payees.
- For tax year 2025 only, **NO penalties** will be imposed under those sections *if you file complete and correct returns and statements*, even if you miss the new breakdowns.([irs.gov](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?utm_source=openai))
- Starting in **tax year 2026**, penalties will be enforced unless full compliance is achieved.([taxnews.ey.com](https://taxnews.ey.com/news/2025-2250?utm_source=openai))
## Action Steps for Employers & Payroll Departments
1. **Audit your payroll systems** now to assess whether you can capture: a) cash tips vs card tips; b) employees’ occupation codes; c) overtime hours and pay that qualify under the law.
2. **Train staff** to categorize tipped occupations—using the TTOCs from Treasury—and correctly calculate qualified overtime.
3. **Communicate with employees**: explain changes, what information they might receive or need to supply (e.g., time card breakdowns).
4. **Voluntarily begin providing detailed statements**, even for 2025, to ease year-end filings and support employees’ ability to claim deductions.
5. **Monitor IRS guidance**: draft Form W-2 and W-4 templates for 2026 have been previewed.([taxnews.ey.com](https://taxnews.ey.com/news/2025-2250?utm_source=openai))
## Example Scenario
- **ACME Café**, with tipped staff and occasional overtime, runs payroll through a payroll service that currently doesn’t track occupation codes or break out tips separately. For 2025, ACME should file W-2s showing the total of wages + tips + overtime. It isn’t penalized for missing detailed tip or overtime breakdowns this year—but should start collecting those details now.
- By **January 2026**, ACME should have its payroll software updated to report qualified tips in a specific box on the Form W-2 (planned for 2026), categorize employees by TTOC, and separately show qualified overtime compensation, so that full compliance is possible.
### Key Takeaways
- **2025 = transition year**: no penalties if you file complete/accurate aggregate numbers.
- **Start now** to collect data, adjust payroll software, and train staff.
- Employees expect to see certain deductions on their 2025 returns; voluntary reporting in 2025 may reduce confusion and errors.
- From 2026 on, reporting becomes more formal and penalties will apply if failed to comply.