IRS Delays New Tip and Overtime Reporting Rules for 2025

Summary: The IRS has delayed new 2025 reporting requirements for tip and overtime deductions under the One Big Beautiful Bill (OBBB), giving employers until 2026 to comply. Learn what this IRS relief means for payroll reporting, Forms W-2/1099, and how to prepare for the upcoming changes.

The One Big Beautiful Bill (OBBB), signed into law July 4, 2025, introduced provisions stating deductions would be allowed for certain qualified cash tips and certain types of overtime compensation. On Nov. 5, 2025, the IRS announced that it would give employers and payors a little breathing room on this issue.

The IRS issued Notice 2025-62,  announcing a one-year delay in enforcing new reporting requirements tied to two brand-new individual deductions: qualified tips (under new I.R.C. §224) and qualified overtime (under new I.R.C. §225). For 2025, that means no penalties if you don’t separately report these amounts on Forms W-2 or 1099. The IRS knows payroll and reporting systems need time to catch up, so the real changes won’t kick in until 2026.

Key Highlights: What the IRS Notice Means for Employers

• For 2025 only, the IRS will not penalize employers or other payors that don’t separately break out (1) reportable cash tips and the worker’s tipped occupation, and (2) qualified overtime compensation on Forms W‑2/1099 or related statements.
• Forms and withholding won’t change for 2025.
• Employers are encouraged (not required) to provide employees with the amounts of qualified tips and/or qualified overtime.
• The IRS has promised additional guidance for individuals to help taxpayers claim these deductions on their 2025 individual income tax returns.

Understanding the New Tip and Overtime Deductions

Section 224 – “No Tax on Tips”: Individuals in listed tipped occupations can deduct up to $25,000 of qualified tips. “Qualified tips” are voluntary cash or charged tips. This can include tips paid by cash, credit/debit card, or common payment apps, but not non‑cash items.

Section 225 – “No Tax on Overtime”: Workers can deduct the overtime premium (the “half” in time‑and‑a‑half) up to $12,500 (or $25,000 on a joint return) for qualified overtime required by Section 7 of the federal Fair Labor Standards Act.

Both deductions are scheduled to apply for tax years 2025–2028, and phase out as modified adjusted gross income rises above $150,000 (or $300,000 if joint).

These new individual deductions resulted in modifications to the reporting requirements for employers and other payors required to file information returns. Employers and other payors were required to report the amount of cash tips and the occupation of the individual receiving the cash tips. It was also required that they report the total amount of qualified overtime compensation.

IRS Announcement Aligns With 2026 Reporting Timeline

On Aug. 7, 2025, the IRS said there would be no changes to 2025 Forms W‑2/1099 or withholding tables for the tips and overtime provisions within OBBB. Those updates are being targeted for 2026. Notice 2025‑62 lines up with that decision by providing 2025 penalty relief and promising more guidance for individuals on how to claim the deductions this filing season.

What Changes – and What Doesn’t

The IRS will not assess penalties under IRC §6721 (failure to file correct information returns) and §6722 (failure to furnish correct payee statements) if employers/payors don’t separately show the new tip and overtime details on 2025 Forms W‑2, 1099, or other required statements, provided the return/statement is otherwise complete and correct. This recognizes that systems and forms aren’t ready yet.

However, employers must still file and furnish the usual forms on time and accurately (wages, total tips that were already required to be reported, etc.). The relief is narrowly focused on the new separate accounting of qualified tip and qualified overtime. Additionally the IRS encourages (but does not require) employers/payors to give employees/payees helpful information, such as tipped occupation codes and separate totals, so individuals can claim their 2025 deductions.

What Employers and Payors Should Do Now

• Keep filing the standard forms correctly for 2025.
• Consider optional worker‑friendly disclosures (for example, Box 14, secure portal, or separate statement) to share tipped occupation codes and separate totals for cash/charged tips and qualified overtime. This will make it easier for employees/payees to claim their deductions.
• Plan for 2026 updates to payroll and reporting systems so you can capture and separately report these amounts when the new forms/boxes arrive.

The Bottom Line: Stay Compliant and Prepare for 2026

Employers and payors should keep reporting accurately under current rules and consider optional disclosures regarding qualified tips and overtime that help workers. Workers should keep solid records and look for future IRS guidance for more details regarding how they can claim the deductions for qualified tips and overtime compensation.

KSM’s tax team is tracking the evolving guidance on the tips and overtime deductions and how it interacts with payroll and year‑end reporting. Contact your KSM advisor to talk through what this relief means for your organization or fill out the form below.