IRS Offers 2025 Penalty Relief for Tip and Overtime Reporting

The IRS has issued new guidance that temporarily eases compliance requirements for employers reporting qualified tips and overtime compensation for tax year 2025.

Under the “One Big Beautiful Bill,” workers may deduct up to $25,000 in tips and $12,500 in overtime from their taxable income. However, employees in certain fields may be excluded from these deductions if their roles fall under “specified service trades or businesses.”

To support employers during this transition, the IRS and the Treasury Department have announced penalty relief for 2025. This grace period gives employers additional time to determine whether their business qualifies as an exempt category and to put the appropriate reporting processes in place.

While final regulations are still pending - and tax forms such as the W-2, 1099-NEC, and 1099-MISC remain unchanged for now - employers should provide employees with the following information so that they can take advantage of these deductions:

• The total amount of cash tips identified by employees

• The employee’s qualifying tipped occupation

• The total amount of qualified overtime compensation paid

Although strict compliance will not be enforced for 2025, preparing now will help ensure a smooth transition once the penalty relief expires. Accurate reporting will become essential beginning in tax year 2026.