Compliance
One, Big, Beautiful Bill: Penalty Relief & Information Reporting on Tips and Overtime for TY 2025
Employers, payors, and tipped workers should understand how the OBBB impacts reporting requirements and penalties for tips and overtime in tax year 2025.
By NomadicTax Research Team • 7 min read • November 20, 2025
## Background
The **One, Big, Beautiful Bill (OBBB)**, U.S. Public Law 119-21, includes new tax deductions and reporting rules for **qualified tips** and **qualified overtime compensation** beginning TY 2025. It also introduces new information reporting requirements for employers and payors. However, the IRS recognized the complexity and issued **penalty relief guidance** in Notice 2025-62. ([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 Are Qualified Tips & Overtime Under OBBB?
- **Qualified Tips**: tips that are reported on a Form W-2, Form 1099, or other specified statements; also include tips reported by individual on Form 4137. To qualify, the occupation of the tip recipient must be among those that “customarily and regularly” received tips as of December 31, 2024. Maximum deduction capped at $25,000; income thresholds phase out for MAGI over $150,000 single / $300,000 married filing jointly. Self-employed in certain specified trade/business and employees in those businesses are excluded. ([eitc.irs.gov](https://www.eitc.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
- **Qualified Overtime Compensation**: similar reporting and deduction structure; amount of overtime above standard hours as defined under FLSA. Employers required to report total overtime paid. ([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))
## Penalty Relief for 2025 (Transition Period)
Notice 2025-62 gives employers and payors relief during tax year 2025 in these areas:
- No penalties for **failing to provide separate accounting of amounts reasonably designated as cash tips** or **failing to report occupation codes for tip recipients**. ([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))
- No penalties for **not separately reporting** qualified overtime compensation totals.
- Relief applies only if the **other information return or payee statement** is otherwise complete and correct.
- Relief applies for **TY 2025 only**, in recognition that systems, payroll, and reporting forms may not yet support new requirements. ([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 Must Employers / Payors Do Anyway
Even with penalty relief, employers are *encouraged* to begin collecting and tracking required information:
- Occupation codes of tipped employees
- Separated cash tip amounts
- Qualified overtime compensation amounts, e.g. via Box 14 of Form W-2 or via other written statements or portals
- Start preparing systems and payroll reporting to be compliant when full enforcement begins
## Practical Advice for Employees & Tipped Workers
- Keep **detailed records** of tips and overtime compensation received, including dates, amounts, and occupation
- Ask your employer for statements showing these amounts
- Even if employer doesn’t provide the separate accounting, you may still claim deductions if you have your own records
- Be aware of your occupation’s tip eligibility – check list when IRS publishes it; claim only if your occupation was included
## Key Dates to Track
| Date | Event |
|------|-------|
| Tax year 2025 | Reporting period with transition penalty relief Active |
| Oct. 2025 | Deadline for IRS to publish occupations list that customarily and regularly received tips as of Dec 31, 2024 |
| Jan. 1, 2026 | Full enforcement of reporting requirements under OBBB begins |
## Impact & Planning
- Creates **one-time cost relief**, but you should use transition period to **build compliance systems**
- Employers who delay or underreport risk penalties when the transition period ends in 2026
- For workers, this opens tax savings via deductions for qualified tips/overtime — keep proof, traceability, documentation
**Bottom line:** TY 2025 is a grace period. If you're an employer or payor, don’t get complacent — start preparing. Employees and tipped workers, organize your documentation now so you're ready to benefit when the law is fully enforced.