In Notice 2025-62, the IRS said that employers will not be subject to penalties for 2025 under IRC Section 6721 for failure to file correct information returns and IRC Section 6722 for failure to furnish correct payee statements reporting qualified tips and qualified overtime compensation.

The IRS also said that additional guidance for individual taxpayers on claiming the deductions for qualified tips and qualified overtime compensation for 2025 is forthcoming.

Background

The "One Big Beautiful Bill Act" (OBBBA) allows individuals to deduct qualifying tips and qualified overtime compensation for federal income tax purposes, effective for tax years beginning in 2025 (see Tax Alert 2025-1476).

The OBBBA imposes a new statutory requirement to report cash tips and the individual's occupation on certain Forms 1099 and on Form W-2. These reporting requirements apply for calendar year 2025. Like the rules for qualified tips, the new federal income tax deduction for individuals with qualified overtime compensation includes qualified overtime that was to be reported on Form W-2 for tax years 2025 through 2028.

The IRS announced in August 2025 that it will not update 2025 individual information returns/statements (Forms W-2/1099) or withholding tables to reflect those changes and that the reporting will apply beginning with Forms W-2 due on February 1, 2027, for calendar year 2026 (see Tax Alert 2025-1671). The IRS subsequently released a draft Form W-2 and draft Form W-4 for 2026 indicating that the qualified tip amount will be reported in Box 12 and the TTOC in Box 14 (see Tax Alert 2025-1745).

Penalty relief

According to Notice 2025-62, the Treasury Department and IRS are aware that employers and payors may not have the required information or systems needed to comply with the new reporting requirements. In addition, the IRS already announced that Forms W-2 and 1099 for tax year 2025 will not be updated. Therefore, tax year 2025 will be regarded as a transition period.

Notice 2025-62 states that penalties for 2025 for failure to separately account for qualified tips and qualified overtime compensation will not apply to employers that file and furnish a complete, correct and timely information return or statement.

For qualified tips, employers and payors are encouraged to (1) provide employees and payees with the occupation codes and separate accountings of cash tips, and (2) indicate whether the employer's trade or business is a specified service trade or business as defined in IRC Section 199A(d)(2) (see Tax Alert 2025-1792 for more information concerning occupation codes). This information can be made available through an online portal, additional written statements furnished to the employees or payees or other secure methods.

For qualified overtime compensation, employers and payors are encouraged to provide employees and payees with separate accountings of overtime compensation. This information can be made available by including it in Box 14 of the employee's Form W-2, or through an online portal, additional written statements furnished to the employees or payees or other secure methods.

Implications

The transition relief provided in Notice 2025-62 should come as no surprise. It aligns with the IRS's announcement in August that "[e]mployers and payroll providers should continue using current procedures for reporting and withholding" for tax year 2025. However, some employers and tax practitioners may be comforted by the IRS's reaffirmation that the OBBBA information reporting requirements for qualified tips and qualified overtime compensation will not apply for 2025.

While voluntary reporting is "encouraged," Notice 2025-62 explicitly states that it is not a condition for obtaining the penalty relief. Employers might consider the pros and cons of voluntary reporting. For example, voluntary reporting may reduce employee inquiries during the 2025 tax filing season, but it might be challenging for employers to decide what amount to report as qualified overtime compensation in the absence of any guidance from the IRS.