Compliance

Understanding the Penalty Relief for Employers Under the One, Big, Beautiful Bill’s New Reporting Rules

Employers face new reporting requirements for tips and overtime under OBBB, but IRS has granted penalty relief for 2025—here’s what to know and how to prepare.

By NomadicTax Research Team • 5-8 min read • November 22, 2025

## What the New Reporting Rules Require The One, Big, Beautiful Bill (OBBB), signed into law July 2025, introduces **new deductions** and **reporting obligations** for tipped employees and qualified overtime compensation. ([irs.gov](https://www.irs.gov/newsroom/news-releases-for-october-2025?utm_source=openai)) ### “No Tax on Tips” Provision: - Employees or self-employed workers can deduct **qualified tips** received in listed occupations. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai)) - Employers/payors must report cash tips separately, along with occupation codes. ([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 Tax on Overtime” Provision: - Deduct the overtime premium portion for employees paid under Fair Labor Standards Act (FLSA) rules. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-provide-guidance-for-individuals-who-received-tips-or-overtime-during-tax-year-2025?utm_source=openai)) ## Penalty Relief for Tax Year 2025: A Transition Period For tax year 2025, the IRS is offering **relief** for employers and payors who don’t yet meet the new reporting 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 this means: - No penalties for failure to provide separate accounting of cash tips and occupation or qualified overtime compensation during 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)) - Forms W-2 and 1099 will **not** be updated yet to include new fields; systems may not be ready. ([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)) ## Actionable Steps for Employers & Payroll Teams ### 1. Evaluate Your Payroll Systems Determine whether your systems can track occupation codes and distinguish between cash tips vs. non-tip income. If not, begin designing or acquiring software upgrades in preparation for 2026. ### 2. Provide Supplemental Reports to Employees Even if you’re not required yet in 2025, giving detailed tip and overtime statements helps employees and reduces confusion. Boxes in payroll or supplemental slips can be used. ### 3. Train HR & Payroll Staff Ensure payroll and HR staff understand definitions of “qualified tips,” “qualified overtime,” and SSTB (Specified Service Trade or Business) exclusions. Clarify income thresholds and phase-outs. ### 4. Update Withholding If Needed Since these new deductions are available for both itemizers and non-itemizers, some employees may want to submit a revised W-4. Use the **Deductions Worksheet** (Step 4(b) on 2025 W-4) to account for them. ([irs.gov](https://www.irs.gov/forms-pubs/how-to-update-withholding-to-account-for-tax-law-changes-for-2025?utm_source=openai)) ### 5. Plan for Form Changes in 2026 Forms may include new boxes or fields in future versions. Keep abreast of IRS announcements and draft proposed regulations once published. ## Practical Example Let’s say you run a restaurant with tipped staff (servers, bartenders). In 2025, you aren’t separately reporting cash tips or occupation. Under the relief, you won’t face penalties for missing data. But starting in **2026**, you’ll need equipped software and reporting procedures in place. Offering tips logs now and showing occupation on employee documents prepare both your team and your payroll processor. ## Takeaway The 2025 penalty relief period gives breathing room—but it’s temporary. Employers should use it as an opportunity to build compliance infrastructure so there are no surprises when OBBB’s reporting obligations kick in for real.