The Internal Revenue Service (IRS) has issued Notice 2025-62, providing significant transition relief for employers grappling with the new reporting mandates under the One, Big, Beautiful Bill Act (OBBBA).
Passed earlier this year, the OBBBA introduced federal income tax deductions for “qualified tips” and “qualified overtime compensation” for tax years 2025 through 2028. To facilitate these deductions, the law technically requires employers to separately report these specific earnings amounts (and corresponding occupation codes for tipped employees) on Forms W-2 and 1099.
However, recognizing that payroll systems need time to adapt, the IRS is offering a grace period for the 2025 tax year.
The Key Update: Penalty Relief for 2025
Under Notice 2025-62, the IRS announced that it will not impose penalties on employers who fail to separately report qualified tips, occupation codes, or qualified overtime compensation on information returns filed for the 2025 tax year.
- Scope of Relief. This applies to penalties under Section 6721 (failure to file correct information returns) and Section 6722 (failure to furnish correct payee statements).
- Condition. To qualify for this relief, employers must still file their returns and furnish statements that are otherwise complete and accurate (e.g., reporting total aggregate wages and taxes withheld as usual).
In short, employers do not need to manually break out overtime or specific tip data on the 2025 Forms W-2 or 1099 to avoid IRS fines this year.
Voluntary Action: Supporting Your Employees
While employers are not required to report these separate amounts on official forms for 2025, the IRS strongly encourages them to provide this information to employees voluntarily.
Without this data, employees may struggle to calculate and claim their new deductions when filing their personal income taxes next year. The IRS suggests providing this information through:
- A separate written statement or earning summary.
- An online payroll portal.
- Box 14 (“Other”) on Form W-2 (for overtime compensation).
Next Steps for Employers
Although penalties are waived for 2025, this is a temporary transition period.
- Review Payroll Capabilities: Use this time to work with your payroll provider to ensure your systems can separately track and report qualified tips and overtime compensation starting in 2026.
- Communicate with Staff: Consider notifying employees that while their W-2s may not explicitly list “deductible overtime,” you can provide the necessary data upon request or through a supplementary statement.
- Watch for 2026 Forms: The IRS has indicated that standard Forms W-2 and 1099 will likely be updated for the 2026 tax year to include dedicated fields for these new reporting items.
