IRS Offers 2025 Penalty Relief for Employers on New Tip and Overtime Reporting Rules
The Department of the Treasury and the Internal Revenue Service (IRS) have announced new penalty relief for tax year 2025 related to updated reporting rules for cash tips and qualified overtime compensation under the One Big Beautiful Bill (OBBB).
This new guidance, published as Notice 2025-62, provides employers and payors with breathing room to adjust to the recently introduced requirements — acknowledging that most payroll and reporting systems aren’t yet ready to handle the additional data required under the OBBB.
At Velin & Associates, Inc., a Los Angeles-based accounting firm serving small businesses, professionals, and creators, we’re breaking down what this means for employers and employees — and how to prepare now before the transition period ends.
💡 What’s New Under the One Big Beautiful Bill (OBBB)
The One Big Beautiful Bill introduced significant tax reforms, including new tax deductions for employees and self-employed individuals who earn tips or overtime compensation.
The new rules provide that:
- Qualified Cash Tips — Certain employees (such as restaurant servers, salon workers, and hospitality staff) may deduct qualified tips reported on Form W-2, Form 1099, or directly on Form 4137 when filing their individual returns.
⠀ - Qualified Overtime Compensation — Employees who earn overtime pay may deduct their qualified overtime compensation if properly reported by employers or payors.
Both deductions are intended to provide relief to workers whose income comes primarily from tips or overtime pay, helping them reduce their taxable income.
However, the reporting burden now falls on employers, who must provide detailed breakdowns of tips, occupations, and overtime compensation on information returns such as Form W-2 or Form 1099.
Why the IRS Announced Penalty Relief for 2025
The IRS recognizes that many employers, payroll processors, and bookkeeping systems are not yet capable of capturing and reporting the level of detail required under these new OBBB rules.
For example, many restaurants and small businesses don’t currently track:
- Which employees receive cash tips versus card tips,
⠀ - What specific occupations those tips relate to (e.g., bartender, server, valet), or
⠀ - The exact portion of total pay that qualifies as “overtime compensation.”
Because of these challenges, the IRS will not impose penalties for tax year 2025 if an employer or payor fails to:
- Separately account for cash tips or the occupation of the person receiving them, or
⠀ - Separately report the total amount of qualified overtime compensation.
To qualify for this relief, the business must still file and furnish complete and accurate forms (such as W-2 or 1099) — even if the new OBBB-specific information isn’t included.
This penalty relief only applies to tax year 2025, making it a transition year before full compliance becomes mandatory in 2026.
Examples
Example 1: A Restaurant in Los Angeles
A restaurant employs 25 workers, most of whom receive both hourly pay and cash tips. The owner uses a standard payroll system that tracks gross wages but not detailed tip categories or employee occupations.
Under the new OBBB rules, this information will need to be reported separately.
However, for 2025, the IRS will not impose penalties as long as the restaurant provides accurate W-2s showing total wages and tips reported by employees.
Starting in 2026, though, this additional breakdown will become mandatory, so upgrading payroll software during 2025 is highly recommended.
This is a good time for restaurant owners to consult with a CPA to prepare for the upcoming changes.
Example 2: A Freelance Filmmaker Hiring Crew
A freelance filmmaker working on commercial shoots pays crew members overtime when productions run long. The filmmaker isn’t required to issue separate reporting for overtime pay in 2025 — but beginning in 2026, that data will need to appear on Forms 1099.
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A CPA for Filmmakers or Creators at Velin & Associates would advise documenting those overtime payments clearly now, so future reporting transitions smoothly and deductions can be properly claimed by the workers.
Example 3: A Dental Practice or Medical Clinic
A CPA for Dental Practices or CPA for Medical Practices would recommend that clinics track their hygienists’ and medical assistants’ overtime hours even during 2025, even though separate reporting isn’t yet required.
This early preparation ensures that your 2026 filings won’t trigger errors or compliance delays once the full reporting rules take effect.
🧠 Why This Matters for Businesses and Workers
While the penalty relief gives employers some time, it’s not a free pass — it’s an opportunity to prepare for more complex reporting ahead.
Businesses that don’t begin adjusting their systems in 2025 could face penalties and compliance issues in 2026, including:
- IRS fines for incorrect or incomplete W-2/1099 filings,
- Delays in employees claiming new deductions, and
- Administrative backlogs when switching to compliant payroll formats.
For workers — especially those in tipped and overtime-heavy industries like restaurants, delivery services, hospitality, and entertainment — accurate employer reporting ensures that they can claim their rightful deductions for tips and overtime pay on their 2025 and future returns.
How Employers Can Prepare Now
To stay ahead, Velin & Associates, Inc. recommends that business owners:
- Review Payroll Systems – Contact your payroll provider or software vendor to confirm whether updates are planned for OBBB reporting in 2026.
⠀ - Implement Internal Tracking – Even if separate tip and overtime data aren’t required for 2025, start recording them for internal accuracy.
⠀ - Educate Staff – Inform employees about the upcoming changes and how their reported tips and overtime may impact future tax deductions.
⠀ - Consult a CPA – A qualified CPA for Online Commerce, Amazon Businesses, or TikTok Creators can ensure your recordkeeping aligns with both current and future IRS requirements.
⠀ - Plan for Compliance – Treat 2025 as your test year — by 2026, these reporting categories will no longer be optional.
What About Employees Claiming Deductions?
For employees and self-employed individuals, the IRS plans to release additional guidance soon explaining how to claim deductions for:
- Qualified tips, and
- Qualified overtime compensation
on their 2025 tax returns.
Even though the IRS isn’t requiring updated forms yet, keeping accurate records of your income breakdowns will make claiming these deductions smoother next year.
🔍 Key Takeaway
The 2025 tax year is officially a transition period under the One Big Beautiful Bill. Employers won’t face penalties for missing certain tip or overtime data — but the smart move is to prepare early.
By 2026, the IRS will expect all employers and payors to fully comply with the new reporting structure.
At Velin & Associates, Inc., we help businesses across industries — from YouTubers, Shopify store owners, and Amazon sellers to dentists, doctors, and high net worth individuals — stay ahead of changing tax laws while minimizing risk and maximizing deductions.
Need Professional Help Preparing for 2026 Reporting Rules?
Our experienced Los Angeles CPAs are ready to help you:
- Upgrade your payroll systems
- Navigate new IRS compliance requirements
- Plan tax-efficient strategies for both employers and employees
For more information about our tax planning services, contact us today: visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
CPA for YouTubers | CPA for Shopify Store | CPA for Online Commerce | CPA for Creators | Shopify Store CPA | CPA for Filmmakers | CPA for Amazon Business | Amazon Business CPA | CPA for Dental Practice | Dentist CPA | Dental Business CPA | Online Commerce CPA | CPA for TikTokers | CPA for Doctors | CPA for Medical Practice | CPA for High Net Worth Individuals
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