If your business has employees who earn tips or overtime, the new rules from the One Big Beautiful Bill Act can feel like a lot to absorb.
The law created new deductions for workers, often referred to as the “no tax on tips” and “no tax on overtime” provisions. It also added extra reporting requirements for employers.
To give everyone time to catch up, the Treasury and IRS have announced penalty relief for tax year 2025 on certain tip and overtime reporting. For the full technical details, you can read the original IRS newsroom release, Treasury, IRS provide penalty relief for tax year 2025 for information reporting on tips and overtime under the One, Big, Beautiful Bill.
In short, 2025 is a transition year. Employers are expected to keep filing accurate W-2s and 1099s, but they will not be penalized for missing some of the new data points that the law eventually requires.
What penalty relief covers for 2025
Under the new guidance, the IRS will not charge the usual information return penalties for tax year 2025 if you are unable to fully comply with the brand new reporting rules around:
- Separately tracking and reporting cash tips on information returns
- Reporting the occupation of employees who receive those tips
- Separately reporting qualified overtime compensation amounts
To qualify for this penalty relief, you still need to do the basics correctly:
- File complete and accurate Forms W-2, 1099 and other required information returns
- Make sure the wage, tip and withholding totals on those forms are correct
If you meet those core requirements, the IRS will not apply penalties just because you did not break out the new tip, occupation or overtime details on your 2025 forms.
Why the IRS is treating 2025 as a transition year
The tip and overtime rules are part of a larger package of provisions under the One Big Beautiful Bill Act. The IRS has a summary of those provisions on its One Big Beautiful Bill provisions page.
The agency has essentially admitted what employers already know:
Most payroll, timekeeping and point of sale systems are not yet set up to capture every new data element that the law technically requires for tips and overtime. Updating software, internal processes and reporting formats takes time.
Because of that, the IRS has said:
- Forms W-2 and 1099 will not be redesigned for 2025 to add the new fields
- 2025 will be treated as a transition period for enforcing the new reporting rules, not a full compliance year
The long term requirements are still coming. This relief simply gives employers breathing room as the details are worked out.
Quick reminder of what changed with tips and overtime
The “no tax on tips” and “no tax on overtime” ideas can sound like tips and overtime are suddenly tax free. That is not quite accurate.
Under the law, qualifying workers may claim new federal income tax deductions for:
- Certain tips that are properly reported
- Certain overtime compensation above regular pay
These deductions apply for tax years 2025 through 2028, with income limits and other eligibility rules. The IRS has a high level overview under “No tax on tips” and “No tax on overtime” on its One Big Beautiful Bill Act: Tax deductions for working Americans and seniors page.
For individual employees, the IRS has also started to publish guidance, such as the newsroom article Treasury, IRS provide guidance for individuals who received tips or overtime during tax year 2025.
The key point for employers is that these worker friendly deductions require better reporting from you, which is why the penalty relief exists in the first place.
What the IRS encourages employers to do in 2025
Even though penalties are relaxed for 2025, the IRS is strongly encouraging employers and other payors to start moving toward the new reporting model. The penalty relief notice suggests that you:
- Provide employees with their occupation and a separate total of cash tips received during the year, especially if they are in an occupation that customarily receives tips
- Provide employees with a separate accounting of overtime compensation, which can help them figure out how much qualifies for the new deduction
You can share this information using methods that fit your systems, such as:
- A secure online payroll portal
- A year end supplemental statement
- Notes in Box 14 of Form W-2 for overtime amounts, if that makes sense for your situation
These extra steps are not required to qualify for penalty relief in 2025. They are simply good practice and will make future compliance easier once full enforcement begins.
Practical impact for your business
If you have tipped or overtime heavy workers in restaurants, hospitality, healthcare, retail or other service industries, here is what this really means for you in 2025:
- You still need to file Forms W-2 and 1099 on time and accurately, just as you do now
- You will not be penalized solely for failing to break out new details like cash tips, worker occupation or qualified overtime on 2025 forms
- Your employees will still be responsible for claiming any new deductions correctly on their personal tax returns
For background on how tip income is generally treated, you can see the IRS publication Publication 531, Reporting Tip Income and the IRS tax tip article Tip income is taxable and must be reported.
Behind the scenes, 2025 is a good year to:
- Review whether your payroll and point of sale systems can eventually track tips and overtime in the detail the law expects
- Coordinate with your payroll provider or software vendor about upcoming changes
- Decide how you want to communicate tip and overtime information to employees going forward
You do not need a perfect system in place today, but you also do not want to wait until penalties are fully active.
How Torkelson & Associates CPAs can help
The new rules around tips and overtime are designed to help workers, but they put more responsibility on employers to collect and report the right information. Penalty relief for 2025 is helpful, but it is also a signal that now is the time to plan.
At Torkelson & Associates CPAs, we can help you:
- Understand how the penalty relief for tip and overtime reporting applies to your specific business
- Review your current payroll, POS and recordkeeping processes
- Map out practical steps to start capturing the right data for tips and overtime
- Coordinate with your payroll provider so that everyone is working from the same playbook
If you employ tipped or overtime workers and are unsure how these 2025 rules affect you, don’t hesitate to contact us. We can help you use 2025 as a true transition year and put you in a strong position for future compliance.