Compliance

New IRS Reporting Rules & Penalty Relief: What Employers and Self-Employed Need to Know

Employers, payors, and self-employed individuals face new reporting rules under OBBBA for tips and overtime – and there’s penalty relief for 2025. Here's what to do.

By NomadicTax Research Team • 5-8 min read • November 19, 2025

## Overview of New Reporting Requirements Under OBBBA (2025) The One, Big, Beautiful Bill Act imposes **new employer/payor reporting duties** for certain deductions, particularly for **qualified tips** and **qualified overtime compensation**. These changes require reporting on information returns like Forms W-2, 1099, or SSA returns, and providing payee statements. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) ### What Employers / Payors Must Report - **Tips**: Amounts reasonably designated as cash tips, the occupation of the tip recipient; values should be reported to allow taxpayers to claim the new tips deduction. ([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)) - **Overtime compensation**: Total amount of qualified overtime compensation must be separately provided via W-2, Form 1099, or statement. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors?utm_source=openai)) ## Penalty Relief for 2025: Transition Period Because these reporting requirements are new, Treasury and IRS have provided **penalty relief** for failure to comply fully in 2025 around: - Not showing separate accounting for cash tips or occupation. - Not separating qualified overtime amounts. As long as returns/statements are otherwise complete and correct. ([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)) ## Timing & Form Changes - **Forms W-2 and 1099** for 2025 will *not* yet include specific fields or codes for these new categories. Existing forms will still be used. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-no-changes-to-individual-information-returns-or-withholding-tables-for-2025-under-the-one-big-beautiful-bill-act?utm_source=openai)) - Employers should plan for updates by 2026: new guidance, new form lines, and occupation codes will be published. ([irs.gov](https://www.irs.gov/newsroom/irs-announces-no-changes-to-individual-information-returns-or-withholding-tables-for-2025-under-the-one-big-beautiful-bill-act?utm_source=openai)) ## Action Steps for Compliance 1. **Audit your payroll systems** now – are you collecting occupation info, overtime data, and tip breakdowns? 2. **Train payroll teams**: Employees should know which tips qualify, what “qualified overtime” means under FLSA. 3. **Inform employees & payees** so they have the documentation needed to claim deductions. 4. **Keep detailed records** for each category – timing matters: amount, job classification, SSN validity, filing status. 5. **Consult IRS transitional guidance & notices** (e.g., Notice 2025-62) to understand available relief in 2025. ([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)) ## Example in Practice A restaurant employer has servers whose W-2s list wages and tips, but previously did not document the *occupation code* nor separately report qualified overtime. For tax year 2025: - They should gather occupation information for tipped employees. - When overtime pay occurs, separate out the qualified overtime portion. - Even if they fail to do so in 2025, they can rely on **penalty relief** provided they otherwise file correct returns. - Moving into 2026, they’ll need new forms or payroll software updates to comply fully. ## Why It Matters - Helps employees/self-employed claim deductions under OBBBA for tips and overtime, increasing take-home. - Employers avoid future enforcement issues and ensure smooth transition. By preparing early, businesses can adjust systems with minimal disruption, ensure correct filings, and take advantage of IRS relief in 2025.