IRS gives employers penalty relief for 2025 tips and overtime tax reporting requirements

November 11, 2025

On November 5, the Internal Revenue Service (IRS) published guidance giving employers a break from penalties for new reporting requirements under the One Big Beautiful Bill Act’s (OBBBA) provision regarding taxes on employee tips and overtime pay.

Under the provision, for tax years 2025 -2028, employees may take an above-the-line tax deduction on qualified overtime pay and qualified tips.

To help accomplish this, employers must report the total amount of qualified tips and overtime pay on their employees’ Forms W-2. They will also need to report the amount of qualified tips and overtime compensation for non-employees on the applicable Forms 1099, even though the federal Fair Labor Standards Act (FLSA) doesn’t apply to independent contractors.

To comply with this reporting requirement, employers must:

• Identify and calculate qualified tips and overtime above the regular rate required by the FLSA, and

• Separate the overtime amounts.

For 2025, however, the IRS won’t penalize employers that fail to file correct information or give employees correct statements.

The IRS realized that employers might not currently have the information they need to report or the systems or procedures in place to be able to correctly file the additional information, and give such information to employees.

The IRS has already announced that it won’t update Forms W-2 and 1099 for the 2025 tax year to account for the OBBBA-related changes.

This doesn’t mean that employers are prohibited from providing the reports. The IRS still recommends that they do. Employers can submit the information:

• Through an online portal, providing additional written statements to employees;

• Using other secure methods; or

• For qualified overtime pay, by entering the amount in Box 14 of employees’ Form W-2.

Key to remember: The IRS won’t penalize employers for not submitting overtime or tip pay information for tax year 2025.