Penalty Relief for Employer Reporting of Qualified Overtime and Tips

The new federal qualified overtime deduction (§225) and qualified tip deduction (§224) – adopted midyear by the passage of the One Big Beautiful Bill but effective for overtime and tips received beginning January 1, 2025 – has created reporting challenges for both taxpayers and tax practitioners. The IRS recognizes that, in some instances, payors and employers may lack the necessary accounting information infrastructure (data, systems, and/or procedures) to fully and accurately comply with these added information reporting requirements. Given (1) that the mid-year law change is a significant contributor to this lack of preparedness and (2) the fact that the IRS had announced in August that Forms W-2 and 1099 for taxable year 2025 will not be updated to reflect these OBBBA-related changes, the IRS concluded that enforcement during this initial year would be difficult.

Notice 2025-62

The IRS recently issued Notice 2025-62 addressing potential failures related to implementing the new reporting requirements. The relief targets penalties imposed under §6721 for failure to file correct information returns and under §6722 for failure to furnish correct payee statements. It is extremely important to understand that is not blanket relief covering all requirements for inclusion of information on certain information returns; the penalty relief granted is strictly limited to the narrow subject of failing to separately report tips, occupation or overtime compensation to the extent that the person otherwise files and furnishes a complete and correct return or statement for amounts paid during 2025 only.

In summary, the Notice provides that the IRS will not impose penalties for 2025 under either section in the following circumstances:

Relief Related to Qualified Tips and Occupations: The penalties will not be imposed if an employer fails to provide the separate accounting of reasonably designated cash tips or the occupation for which the tips are earned (see proposed regulations for over 70 separate eligible occupations of tipped workers) on any of the returns or statements required to be filed.

Relief Related to Qualified Overtime Compensation: The penalties will not be imposed if an employer fails to separately provide the total amount of qualified overtime compensation as defined in §225 on any of the returns or statements required to be filed.

The IRS has determined that taxable year 2025 will be regarded as a transition period for the enforcement and administration of the new information reporting requirements. Employers should be taking steps now to be able to accumulate and provide this information for 2026 and later tax years.

Even with the penalty relief, the IRS is still encouraging employers to provide overtime and tip information to employees to allow them to determine if they are eligible to claim the deductions. The IRS suggests providing the information through an online portal, in an additional written statement, or in Box 14 of the employee’s Form W-2.

Risk of Reporting an Incorrect Amount

Employers may want to exercise caution, as some tax experts are concerned about the risk of reporting an incorrect amount on the W-2 for 2025 and possibly exposing employers to litigation risk under existing tax law, even with the penalty relief for non-reporting. Specifically for example, §7434 allows employees to bring civil action for “fraudulent” filing of an information return, with potential damages of $5,000 or more per employee. While this risk may be small from a practical perspective, employers may want to simply rely on the penalty relief for 2025 and report nothing on the W-2 itself but to be prepared, in the interest of good employee relations, to provide certain information to employees allowing them to separately conclude whether they are entitled to, and the amount of, any deduction.

Finally, this relief applies for IRS tax reporting purposes only; employers may still be required to comply with separate Department of Labor (DOL) regulations.