IRS Provides Penalty Relief for Tip and Overtime Reporting in 2025

(Parker Tax Publishing November 2025)

The IRS provided penalty relief for tax year 2025 in connection with the implementation of the new information reporting requirements related to the deductions for qualified tips and qualified overtime compensation that were added to the Code by the One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21). Specifically, the notice provides relief from the penalty under Code Sec. 6721 for failure to file correct information returns and the penalty under Code Sec. 6722 for failure to furnish correct payee statements. Notice 2025-62.

Deduction for Qualified Tips

The One Big Beautiful Bill Act (OBBBA) added new Code Sec. 224, providing a deduction for "qualified tips" that are received during the tax year. Qualified tips generally are cash tips received by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. Individuals are allowed a deduction, subject to limitations, in an amount equal to the qualified tips received during the tax year that are: (1) included on a Form W-2, Wage and Tax Statement, under Code Sec. 6051(a)(18); (2) included on a 1099 form under Code Sec. 6041(d)(3), Code Sec. 6041A(e)(3), or Code Sec. 6050W(f)(2); or (3) reported by the taxpayer on Form 4137, Social Security and Medicare Tax on Unreported Tip Income (Code Sec. 224(a)).

The OBBBA added to the information reporting requirements of the Code for certain payments of cash tips by:

(1) amending Code Sec. 6041(a) to require a payor to include on the information return filed a separate accounting of any such amounts reasonably designated as cash tips and the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(2) adding new paragraph (d)(3) to Code Sec. 6041 to provide that in the case of compensation to non-employees, a payor is required to include on the written statement furnished to the payee the portion of payments reasonably designated as cash tips and the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(3) amending Code Sec. 6041A(a) to require a payor to include on the information return filed a separate accounting of any such amounts reasonably designated as cash tips and the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(4) adding new paragraph (e)(3) to Code Sec. 6041A to provide that in the case of Code Sec. 6041A(a), a payor is required to include on the written statement furnished to the payee the portion of payments reasonably designated as cash tips and the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(5) adding new paragraph (a)(3) to Code Sec. 6050W to provide that in the case of a third party settlement organization (TPSO), the TPSO is required to include on the information return filed the portion of reportable payment transactions that have been reasonably designated by payors as cash tips and the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(6) amending Code Sec. 6050W(f)(2) to require a TPSO to include on the written statement furnished to the payee a separate accounting of any such amounts that have been reasonably designated by payors as cash tips and the occupation described in Code Sec. 224(d)(1) of the person receiving such tips; and

(7) adding new paragraph (a)(18) to Code Sec. 6051 to provide that an employer must include on the written statement furnished to the employee the total amount of cash tips reported by the employee under Code Sec. 6053(a) and the occupation described in Code Sec. 224(d)(1) such person.

The amendments to the Code with respect to qualified tips, including the additional information reporting requirements, apply to tax years beginning after December 31, 2024.

Deduction for Qualified Overtime Compensation

The OBBBA also added new Code Sec. 225, providing a deduction, subject to limitations, in an amount equal to the qualified overtime compensation received during the tax year and included on a (1) Form W-2, Wage and Tax Statement, under Code Sec. 6051(a)(19); or (2) 1099 form under Code Sec. 6041(d)(4).

The OBBBA added to the information reporting requirements of the Code for certain payments of qualified overtime compensation by:

(1) adding new paragraph (a)(19) to Code Sec. 6051 to provide that an employer must include on the written statement furnished to the employee the total amount of qualified overtime compensation (as defined in Code Sec. 225(c));

(2) amending Code Sec. 6041(a) to require a payor to include on the information return filed a separate accounting of any amount of qualified overtime compensation (as defined in Code Sec. 225(c)); and

(3) adding new paragraph (d)(4) to Code Sec. 6041 to provide that a payor is required to include on the written statement furnished to the payee the portion of payments that are qualified overtime compensation (as defined in Code Sec. 225(c)).

These amendments, including the additional information reporting requirements, apply to tax years beginning after December 31, 2024.

Notice 2025-62

On November 5, the IRS issued Notice 2025-62 to provide penalty relief for tax year 2025 in connection with the new reporting requirements related to the deductions for qualified tips and qualified overtime compensation.

Qualified Tips and Occupations

Prior to the enactment of the OBBBA, payors reporting payments pursuant to Code Secs. 6041, 6041A, and 6050W, were not required to include a separate accounting of amounts designated as cash tips or the occupation of recipients. Employers reporting the payment of wages pursuant to Code Sec. 6051 generally were required to report certain tips but were not required to report the occupations of employees.

The IRS is aware that payors and employers may not currently have the information required to be reported under the information reporting changes made by the OBBBA, or the systems or procedures in place to be able to correctly file the additional information (or the Social Security Administration (SSA) in the case of a Form W-2) and furnish such information to payees and employees. Moreover, the IRS has already announced in IR-2025-82 (Aug. 7, 2025) that Forms W-2 and 1099 for tax year 2025 will not be updated to account for the OBBBA-related changes.

Therefore, tax year 2025 will be regarded as a transition period for purposes of IRS enforcement and administration of the new information reporting requirements for cash tips added to the Code by the OBBBA.

For tax year 2025, the IRS will not impose a penalty under Code Sec. 6721 for failure to file correct information returns or Code Sec. 6722 for failure to furnish correct payee statements in any of the following circumstances:

(1) if a payor required to file an information return under Code Sec. 6041(a) fails to provide on that return a separate accounting of any such amounts reasonably designated as cash tips or the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(2) if a payor required to furnish a written statement under Code Sec. 6041(d) fails to provide on that statement the portion of payments that have been reasonably designated as cash tips or the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(3) if a payor required to file an information return under Code Sec. 6041A(a) fails to provide on that return a separate accounting of any such amounts reasonably designated as cash tips or the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(4) if a payor required to furnish a written statement under Code Sec. 6041A(e) fails to provide on that statement the portion of payments that have been reasonably designated as cash tips or the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(5) if a TPSO required to file an information return under Code Sec. 6050W(a) fails to provide on that return the portion of reportable payment transactions that have been reasonably designated by payors as cash tips or the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(6) if a TPSO required to furnish a written statement under Code Sec. 6050W(f) fails to provide on that statement a separate accounting of any such amounts that have been reasonably designated by payors as cash tips or the occupation described in Code Sec. 224(d)(1) of the person receiving such tips;

(7) if an employer required to furnish a written statement under Code Sec. 6051(a) fails to provide on that statement the total amount of cash tips reported by the employee under Code Sec. 6053(a) or the occupation described in Code Sec. 224(d)(1) of such employee; or

(8) if an employer required to file a copy of the written statement under Code Sec. 6051(a) with the SSA pursuant to Code Sec. 6051(d) fails to provide on that statement the total amount of cash tips reported by the employee under Code Sec. 6053(a) or the occupation described in Code Sec. 224(d)(1) of such employee.

The penalty relief provided in Notice 2025-62 is limited to returns and statements filed and furnished with respect to tax year 2025. The penalty relief applies only to the extent that the person required to make the return or statement otherwise files and furnishes a complete and correct return or statement. A complete return or statement must include the amount of cash tips that would otherwise be required to be separately accounted for on the return or statement in the aggregate amount of payments required to be reported under Code Sec. 6041(a) or (d), Code Sec. 6041A(a) or (e), the gross amount of reportable payment transactions required to be reported under Code Sec. 6050W(a) or (f), or the total amount of wages paid required to be reported under Code Sec. 6051(a) or (d).

While not a requirement to receive the penalty relief provided in Notice 2025-62, the IRS encourages employers and payors to provide employees and payees, particularly those in a tipped occupation, with the occupation codes and separate accountings of cash tips, such that the employee or payee has the information the employee or payee needs to determine whether the employee or payee can claim the deduction for qualified tips under Code Sec. 224 for tax year 2025. Employers are also encouraged to provide employees with information regarding whether the employer's trade or business is a specified service trade or business as defined in Code Sec. 199A(d)(2). Employers and payors can make such information available to their employees and payees through an online portal, additional written statements furnished to the employees or payees, or other secure methods.

Qualified Overtime Compensation

Prior to the enactment of the OBBBA, payors reporting payments pursuant to Code Sec. 6041 were not required to file returns and furnish statements containing a separate accounting of amounts designated as qualified overtime compensation. Employers reporting the payment of wages pursuant to Code Sec. 6051 generally were also not required to separately report the total amount of qualified overtime compensation. The Treasury Department and the IRS are aware that payors and employers may not currently have the information required to be reported by the OBBBA or the systems or procedures in place to be able to correctly file the additional information with the Secretary (or the SSA in the case of a Form W-2) and furnish such information to payees and employees. Therefore, taxable year 2025 will be regarded as a transition period for purposes of IRS enforcement and administration of the new information reporting requirements for qualified overtime compensation added to the Code under the OBBBA.

The IRS will not impose a penalty under Code Secs. 6721 or 6722 in any of the following circumstances:

(1) if an employer required to furnish a written statement under Code Sec. 6051(a) fails to separately provide on that statement the total amount of qualified overtime compensation (as defined in Code Sec. 225(c));

(2) if an employer required to file a copy of the written statement under Code Sec. 6051(a) with the SSA pursuant to Code Sec. 6051(d) fails to separately provide on that statement the total amount of qualified overtime compensation (as defined in Code Sec. 225(c));

(3) if a payor required to file an information return under Code Sec. 6041(a) fails to provide on that return a separate accounting of any amount of qualified overtime compensation (as defined in Code Sec. 225(c)); or

(4) if a payor required to furnish a written statement under Code Sec. 6041(d) fails to provide on that statement the portion of payments that are qualified overtime compensation (as defined in Code Sec. 225(c)).

The penalty relief provided in this notice is limited to returns and statements filed and furnished with respect to tax year 2025. The penalty relief applies only to the extent that the person required to make the return or statement otherwise files and furnishes a complete and correct return or statement. A complete return or statement must include the amount of qualified overtime compensation that would otherwise be required to be separately accounted for on the return or statement in the aggregate amount of payments required to be reported under Code Sec. 6041(a) or (d), or in the total amount of wages required to be reported under Code Sec. 6051(a).

While not a requirement to receive the penalty relief provided in Notice 2025-62, the IRS encourages employers and payors to provide employees and payees with separate accountings of overtime compensation such that the employee or payee has the information the employee or payee needs to determine whether the employee or payee can claim the deduction for qualified overtime compensation under Code Sec. 225 for tax year 2025. Employers and payors can make such information available to their employees and payees by including it in box 14 of the employee's Form W-2, or through an online portal, additional written statements furnished to the employees or payees, or other secure methods.

Observation: The IRS stated that additional guidance for individual taxpayers addressing how they can claim the deductions for qualified tips and qualified overtime compensation when they file their tax year 2025 returns is forthcoming.

For a discussion of the deduction for qualified tips, see Parker Tax ¶81,701. For a discussion of the deduction for qualified overtime compensation, see Parker Tax ¶81,801.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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