Compliance
How the OBBB Penalty Relief Affects Your Payroll Reporting and What You Should Do Now
With new One, Big, Beautiful Bill rules around tips and overtime reporting introducing fresh complexity, the IRS’s recent penalty relief offers breathing room. Here’s what you need to know to stay compliant in 2025.
By NomadicTax Research Team • 5-8 min read • November 14, 2025
## Understanding the New Reporting Requirements Under the OBBB
The One, Big, Beautiful Bill (OBBB), enacted July 4, 2025, introduces several reporting rules for **cash tips** and **qualified overtime compensation**, including:
- Employers and other payors must report amounts of tips and overtime on information returns (e.g., W-2, Forms 1099).
- Must provide statements to employees/payees showing cash tips received and their occupation, and total qualified overtime paid. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
Since these changes are complex, the IRS has now provided **penalty relief** for tax year 2025. Under Notice 2025-62:
- Employers won’t be penalized for failing to separately designate cash tips or occupation, **or** failing to separately provide total qualified overtime compensation, *for returns/statements filed for 2025*, if they file otherwise complete and correct returns/statements. ([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))
- Forms W-2 and 1099 for 2025 are not updated to reflect OBBB changes yet, so this relief helps accommodate that lag. ([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 Employers & Tax Professionals Should Do Now
| Action | Description |
|---|---|
| Assess systems & payroll processes | Review whether payroll systems can capture “occupation”, cash tip breakdowns, and overtime figures in forms/examples. If not, plan to add or update these. |
| Inform employees/payees | While not required to provide all breakdowns for 2025, encourage voluntary reporting of occupation or tip-amount detail to help employees later claim deductions. |
| Document efforts | As relief depends on filing “complete & correct” returns/statements, keep records showing attempts to collect/report new data, even if imperfect. |
| Monitor IRS updates | More guidance is expected on how individuals will claim deductions for tips/overtime under OBBB, and updated forms for 2026. |
## Examples to Illustrate the Relief
- **Restaurant example**: A restaurant pays staff who receive cash tips. Their payroll system doesn’t yet track occupation codes. Under the relief, failing to separately report occupation or tips in categorized form won’t trigger penalties for 2025 as long as returns/statements are otherwise complete and accurate. |
- **Overtime example**: A warehouse has employees who regularly work overtime. Employer’s systems capture total wages but not “qualified overtime” portions distinctly. For 2025, penalties for not separately providing these details are waived, assuming returns reflect total compensation. |
## Going Forward: Preparation for 2026
The penalty relief is temporary. From tax year 2026 onward:
- Employers/payors are expected to comply fully with the new reporting requirements under OBBB. Forms will be updated. |
- Failure to meet new report/statement standards could lead to penalties. |
- Individuals may depend on employer reports or statements to claim the “no-tax on tips” or “no‐tax on overtime” deductions. |
**Bottom line**: For 2025, the IRS is giving employers & payors flexibility. Use this transition period to update reporting infrastructure, educate staff or employees, and position yourself for full compliance starting in 2026.