On November 5, 2025, the Treasury Department and Internal Revenue Service issued Notice 2025-62, providing significant penalty relief to employers and payors facing new information reporting requirements under the One, Big, Beautiful Bill Act. This guidance establishes Tax Year 2025 as a transition period, protecting businesses from penalties while they implement systems to comply with expanded reporting obligations for cash tips and qualified overtime compensation.
Understanding IRS Notice 2025-62: Penalty Relief Explained
What Penalties Are Waived for 2025?
The IRS will not assess penalties against employers and other payors who fail to separately report:
- Cash tips amounts on Forms W-2 and 1099
- Occupation codes for employees receiving cash tips
- Qualified overtime compensation totals on information returns
This relief applies exclusively to Tax Year 2025 and only when employers otherwise file complete and correct information returns by the standard deadlines.
Why the IRS Granted This Relief
Treasury and IRS officials recognize that most employers:
- Lack the data infrastructure to segregate cash tip information by occupation
- Have not modified payroll systems to separately track qualified overtime compensation
- Cannot update current Form W-2 and 1099 templates, as the IRS confirmed these forms remain unchanged for 2025
The penalty relief provides necessary breathing room for organizations to develop compliant reporting processes without facing financial sanctions during implementation.
New OBBB Reporting Requirements: What’s Coming
No Tax on Tips Provision
Under the One, Big, Beautiful Bill Act, eligible employees and self-employed individuals can deduct qualified tips. To support this benefit, employers and payors must:
- Report cash tips separately on information returns filed with the IRS or the Social Security Administration
- Include occupation codes identifying the tip recipient’s job classification
- Provide detailed statements to employees showing the cash tip amounts used for calculating the deduction
These requirements affect restaurants, hospitality businesses, service industries, delivery companies, and any organization where employees receive cash gratuities.
No Tax on Overtime Provision
Qualified individuals can deduct overtime compensation reported on Forms W-2 or 1099. Employers must:
- Separately identify qualified overtime compensation amounts on information returns
- Report total overtime separately from regular wages
- Provide clear statements to workers showing overtime amounts eligible for the deduction
This impacts businesses across all industries with hourly workers, particularly in manufacturing, healthcare, retail, transportation, and construction.
Compliance Strategies for Tax Year 2025
What Employers Should Do Now
For Organizations with Tipped Employees:
- Inventory current tip tracking systems to identify gaps in occupation code capture
- Review POS and payroll integration for cash tip recording accuracy
- Assess Form W-2 Box 14 capacity for supplemental reporting options
- Plan employee communication explaining where to find tip information for tax filing
For Organizations Paying Overtime:
- Audit timekeeping systems for overtime hour calculation accuracy
- Evaluate payroll reporting capabilities to separate overtime from regular wages
- Consider Box 14 reporting on Form W-2 for overtime transparency
- Develop secure online portals for employee access to overtime details
For All Employers:
- Document good-faith compliance efforts to demonstrate reasonable cause if issues arise
- Establish written procedures for 2026 full compliance
- Budget for system upgrades required for permanent implementation
- Coordinate with payroll vendors on the timeline for software updates
Voluntary Best Practices (Not Required for Penalty Relief)
While not mandatory to receive penalty relief, the IRS encourages employers to voluntarily provide:
- Occupation codes for tipped positions
- Separate accounting of cash tips by employee
- Detailed overtime compensation breakdowns
- Access through secure online portals or supplemental statements
Providing this information helps employees accurately claim their deductions when filing 2025 returns, reducing taxpayer confusion and potential IRS inquiries.
Information Return Filing Considerations
Standard Filing Requirements Still Apply
Penalty relief does not excuse employers from:
- Meeting Form W-2 and 1099 filing deadlines (January 31, 2026)
- Reporting total wages, tips, and compensation accurately
- Providing complete payee statements to employees and contractors
- Filing electronically when threshold requirements are met
- Submitting Forms W-2 to the Social Security Administration
The relief specifically targets the new OBBB requirements for separately stated tips and overtime only.
Penalties That Still Apply in 2025
Employers remain subject to standard information return penalties for:
- Late filing or failure to file
- Incorrect taxpayer identification numbers (TINs)
- Missing or incomplete payee information
- Failure to furnish statements to recipients
- Intentional disregard of filing requirements
Notice 2025-62 provides targeted relief, not blanket immunity from all reporting penalties.
Industry-Specific Impacts
Restaurants and Hospitality
Restaurants, hotels, casinos, and hospitality businesses employing tipped workers face the most complex compliance challenges. Current POS systems typically capture total tips but rarely assign the occupation codes required under OBBB. Consider:
- Integrating occupation data into employee master files
- Mapping job titles to standardized occupation codes
- Training managers on proper tip allocation and documentation
- Evaluating third-party tip reporting solutions for compliance automation
Healthcare and Manufacturing
Industries with significant overtime compensation must enhance timekeeping to separately identify qualified overtime hours. Key steps include:
- Distinguishing overtime types (standard time-and-a-half, double-time, special rates)
- Calculating qualified vs. non-qualified overtime based on OBBB definitions
- Implementing reporting fields in payroll systems for overtime segregation
- Establishing review procedures to verify overtime calculation accuracy
Multi-State Employers
Organizations operating across multiple states face additional complexity when state wage reporting requirements differ from federal OBBB standards. Develop:
- Jurisdiction-specific reporting matrices showing federal vs. state requirements
- System capabilities to generate different reports by the tax authority
- Compliance calendars tracking varied filing deadlines
- Centralized documentation of multi-state compliance approaches
Tax Year 2026: Full Compliance Expected
Timeline for Implementation
The IRS has made clear that 2025 is a transition year only. By Tax Year 2026, employers must fully comply with OBBB information reporting requirements or face standard penalties.
Critical Dates:
- Q1 2026: IRS expected to release updated Form W-2 and 1099 instructions
- Q2 2026: Software vendors to deploy OBBB-compliant payroll updates
- Q3 2026: Employer testing and staff training period
- Q4 2026: Final preparation before January 2027 reporting season
Preparing for 2026 Compliance
System Requirements:
- Enhanced payroll databases capturing occupation codes and overtime classifications
- Modified information return generation with separate tip and overtime fields
- Integrated reporting to IRS, SSA, state agencies, and employees
- Audit trails documenting data sources and calculation methodologies
Process Requirements:
- Written policies defining qualified tips and overtime compensation
- Employee communication explaining new deduction benefits
- Quality assurance procedures validating data accuracy
- Vendor management ensuring third-party processors meet requirements
Resource Requirements:
- Budget allocation for software licensing or development costs
- Staff training on new reporting obligations
- Tax professional consultation on complex scenarios
- Documentation supporting reasonable cause if penalties arise
Technology Solutions for OBBB Compliance
What Modern Tax Compliance Software Provides
Purpose-built information return software helps organizations manage expanded OBBB requirements through:
Automated Data Collection:
- Integration with payroll, timekeeping, and POS systems
- Real-time capture of tips, occupation codes, and overtime hours
- Validation rules preventing incomplete or inconsistent data entry
- Audit trails showing data source and transformation
Intelligent Form Generation:
- Automatic population of Form W-2 boxes and supplemental statements
- Conditional logic applying OBBB requirements based on employee classification
- Box 14 optimization for tips and overtime when no dedicated field exists
- Multi-year form library supporting current and historical reporting
Compliance Management:
- Built-in IRS e-filing with automatic receipt confirmation
- Deadline tracking for federal, state, and SSA submissions
- Penalty calculation and exposure analysis
- Correction workflow for amended returns
Employee Self-Service:
- Secure portals for W-2 and 1099 access
- Detailed breakdowns of tips and overtime for tax preparation
- Historical document retrieval
- Direct integration with tax preparation software
Evaluating Software for OBBB Readiness
When assessing tax compliance solutions, ask vendors:
- When will your platform support OBBB tip and overtime reporting?
- How do you capture occupation codes for tipped employees?
- Can your system distinguish qualified from non-qualified overtime?
- What Box 14 reporting capabilities exist for supplemental data?
- Do you provide employee-facing tools for deduction calculation?
- How do you handle multi-state compliance variations?
- What audit and documentation features support reasonable cause defenses?
Frequently Asked Questions
Q: Does penalty relief apply if I file Form W-2 late? No. The relief only covers the new OBBB requirements for separately reporting tips and overtime. Standard late filing penalties still apply.
Q: Must I provide occupation codes to receive penalty relief? No. Penalty relief is automatic if you otherwise file complete and correct returns. However, providing occupation codes helps employees claim their deductions.
Q: Can I use Form W-2 Box 14 to report tips and overtime for 2025? Yes. Since the IRS hasn’t updated form fields, Box 14 is an acceptable location for voluntary supplemental reporting.
Q: Do I need to separately track cash tips vs. credit card tips? The OBBB focuses on cash tips. However, best practice suggests tracking both types separately to avoid employee confusion about deductible amounts.
Q: What if my payroll system can’t separate overtime until 2026? You’re protected by penalty relief for 2025. Document your implementation plan to demonstrate reasonable cause and prioritize 2026 compliance.
Q: Does this relief apply to 1099 forms for contractors receiving tips? Yes. Notice 2025-62 applies to all information returns and payee statements, including Forms 1099-MISC and 1099-NEC reporting tips or overtime.
Q: Will state tax agencies provide similar penalty relief? State approaches vary. Many states conform to federal information reporting but maintain independent penalty structures. Consult state-specific guidance.
Preparing for Upcoming IRS Guidance
The IRS announcement indicates additional guidance is forthcoming for:
- Individual taxpayers claiming tips and overtime deductions on 2025 returns
- Calculation methodologies for qualified tips and qualified overtime compensation
- Updated Form W-2 and 1099 specifications for Tax Year 2026
- Occupation code standards and mapping from common job classifications
Tax professionals should monitor IRS.gov and subscribe to IRS e-News to receive updates as guidance releases throughout 2026.
Strategic Takeaways for Employers
The penalty relief for Tax Year 2025 provides critical breathing room, but successful organizations are treating this as an implementation deadline, not an excuse for inaction. The most prepared businesses are:
- Starting now on system assessments and gap analyses
- Engaging vendors early to secure development resources
- Budgeting appropriately for technology and process changes
- Documenting efforts to establish good faith compliance
- Training staff on new concepts and requirements
- Communicating proactively with employees about changes
The transition from penalty relief to full enforcement will arrive quickly. Organizations that use 2025 as a planning year will avoid the compliance scrambles and costly penalties that await those who delay.
