The New Reporting Rules Under OBBB
The One, Big, Beautiful Bill (OBBB), Public Law 119-21, creates new requirements for reporting:
- Cash tips and qualified overtime compensation must now be separately reported on information returns like Forms W-2 or 1099. (irs.gov)
- Employers/payors must also provide statements to employees or payees detailing the cash tips received and occupation, and overtime amounts. (irs.gov)
Penalty Relief for 2025
Recognizing implementation challenges, the IRS and Treasury issued transition penalty relief via Notice 2025-62: Employers and payors will not be penalized for failing to:
- Provide separate accounting of cash tips or list the occupation of the tip recipient.
- Separately report total qualified overtime compensation. (irs.gov)
This relief is only for tax year 2025, and is conditional on filing a complete and correct return or statement overall. (irs.gov)
What Employers Should Do Now
- Audit existing systems & payroll processes to see if you're ready to report tips and overtime separately. Even though penalties are waived in 2025, expect full compliance to begin 2026. (irs.gov)
- Provide employees with information: occupation codes, statements of cash tips, hours or details of overtime. Even with relief, sharing helps employees claim deductions properly. (irs.gov)
- Check Forms: While Forms W-2 and 1099 will not be updated for 2025 to reflect these new reporting items, box 14 may be used for overtime compensation, or other attached statements. (irs.gov)
- Plan for updates: New forms, withholding tables, and software upgrades are forthcoming for 2026 to support OBBB. Join IRS webinars or monitor guidance. (irs.gov)
Implications for Employees & Payees
- Employees in tipped occupations can deduct “qualified tips,” up to $25,000; Deduction phases out over AGI thresholds. (irs.gov)
- Similarly, qualified overtime compensation (the “half” portion over base pay) may be deductible, with limits, again subject to reporting. (irs.gov)
Example Scenario
Scenario: Sarah works in a restaurant (a “tipped occupation”). In 2025, she receives $10,000 in cash tips, but her employer does not provide an occupation code or separate tip accounting in her wages statement.
- Under OBBB, Sarah may still be eligible to deduct her qualified tips. The employer is protected from penalties as long as their overall return is otherwise correct. (irs.gov)
Key Takeaways
Employers get temporary relief, but momentum toward full compliance is building. Employees in tipping or overtime roles should prepare to rely on new reporting items. Start now to align systems and policies for the transition.