Compliance
Penalty Relief and Reporting Changes: What Employers Need to Know
Employers face new reporting obligations under the OBBB and IRS is offering penalty relief for 2025. Understand what counts as ’qualified tips’ and ‘qualified overtime’ and how to implement correctly without penalties.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## New Reporting Obligations Under OBBB for Employers
Under the One, Big, Beautiful Bill (passed July 4, 2025), employers and other payors now have additional obligations to report:
- **Qualified tips**: Tips received by workers in occupations customarily and regularly receiving tips and reported to employer or IRS. Mandatory service charges are excluded. ([irs.gov](https://www.irs.gov/forms-pubs/how-to-update-withholding-to-account-for-tax-law-changes-for-2025?utm_source=openai))
- **Qualified overtime compensation**: Amounts above regular rate under FLSA for overtime hours worked. Only compensation exceeding regular rate counts. ([irs.gov](https://www.irs.gov/forms-pubs/how-to-update-withholding-to-account-for-tax-law-changes-for-2025?utm_source=openai))
Complying with these reporting rules includes issuing correct information returns and furnishing accurate payee statements. The employer or payor must include this information beginning for tax year 2025. If not, significant penalties could apply. ([irs.gov](https://www.irs.gov/irb/2025-48_IRB?utm_source=openai))
## What the IRS Is Offering: Penalty Relief for 2025
Recognizing the complexity, the IRS issued **Notice 2025-62** providing relief from penalties under sections 6721 (failure to file correct information returns) and 6722 (failure to furnish correct payee statements) for tax year 2025, specifically for qualified tips and qualified overtime reporting. ([irs.gov](https://www.irs.gov/irb/2025-48_IRB?utm_source=openai))
### Key Features of the Relief:
- Only applies to **tax year 2025**.
- Covers penalties for **incorrect or missing information returns and payee statements** regarding these new items. ([irs.gov](https://www.irs.gov/irb/2025-48_IRB?utm_source=openai))
- But doesn’t absolve employers from filing requirement—they must still report. Relief is about penalty, not obligation. ([irs.gov](https://www.irs.gov/irb/2025-48_IRB?utm_source=openai))
## Practical Steps for Employers
- Review payroll systems to identify:
- Employees in occupations that receive tips;
- Overtime pay elements in HR/payroll.
- Update payroll reporting templates to include new line items for **qualified tips** and **qualified overtime compensation**.
- Ensure payee statements match information returns.
- Train payroll and HR staff on definitions (e.g., regular vs. overtime rate, customary tip occupations, service charges vs. tips).
- Use the penalty relief window: even if fully compliant, mistakes will have some protection for 2025—but strive for accuracy. ([irs.gov](https://www.irs.gov/irb/2025-48_IRB?utm_source=openai))
## Example: Implementing Reporting & With Relief
Jane’s Bistro has several employees who receive tips and also work overtime. Prior to 2025, tips were simply included as income in W-2. Now, starting tax year 2025, they must distinguish “qualified tips” on returns and issue payee statements for tips and overtime above regular rate. If Jane’s payroll reports in early 2026 contacts trace errors in statements or returns, **Notice 2025-62** may allow Jane’s to avoid penalties for tax year 2025 if inaccuracies are good faith. But she must correct filings as needed.
## Bottom Line for Employers
- Don’t wait—update systems now, even though penalties relief gives some buffer.
- Keep detailed records to defend reporting positions if audited.
- Understand definitions to avoid unintended non-compliance.
- Consult payroll technology vendors or tax advisors to implement changes smoothly.
By combining compliance with available relief, employers can avoid surprises and ensure a smooth transition into the post-OBBB reporting environment.