The new “no tax on tips” and “no tax on overtime” deductions require additional reporting by employers and payers. To help, the IRS is offering penalty relief in 2025.
The new “no tax on tips” and “ no tax on overtime ” deductions require additional reporting by employers and other payers. However, rather than require more reporting this late in 2025, the IRS is offering penalty relief.
The IRS has released new guidance to help employers and other payers navigate reporting requirements for cash tips and qualified overtime compensation under the One Big Beautiful Bill Act . The guidance provides penalty relief from the new information reporting requirements related to the new deduction—specifically, employers and other payers will not be penalized for failing to file correct information returns or providing correct payee statements to employees and other payees in 2025 for purposes of the deductions.Typically, employers and payers are subject to penalties under sections 6721 and 6722 for failure to file information forms—those are forms like Form W-2 and Form 1099 that must be provided to employees and workers, typically by January 31 following the tax year. The new deductions for tips and overtime mean are only available for income reported on those information returns. The problem? That could be challenging. Fortunately, under the new guidance, employers and other payers will not face penalties for failing to provide a separate accounting of any amounts reasonably designated as cash tips or the occupation of the person receiving such tips. Additionally, employers and other payers will not face penalties for failing to separately report the total amount of qualified overtime compensation. The relief applies only to returns and statements filed for the 2025 tax year and only if the person required to file a complete and correct return or statement does so.Yes, the IRS says that employers and other payers are encouraged to provide employees and payees, especially those in tipped occupations, with the occupation codes and separate records of cash tips so they can claim the deduction for qualified tips in tax year 2025. Additionally, employers and payers are encouraged to supply separate records of overtime pay, ensuring employees and payees have the necessary information to claim the deduction for qualified overtime compensation for 2025. Employers can share this information through an online portal, written statements, other secure methods, or, for overtime pay, in Box 14 of the employee’s Form W-2.The relief was expected for a few reasons. First, Form W-2 currently doesn’t require certain types of income, such as overtime, to be reported separately. To switch gears this late in the tax year would be overwhelming for businesses and the IRS—that’s why the IRS hadWhile tax year 2025 will be treated as a transition period for IRS enforcement and administration of the new information reporting requirements for cash tips and qualified overtime compensation under OBBBA, reporting requirements will be different for 2026. Notably,Under OBBBA, tip income is temporarily deductible—only for tax years 2025 through 2028—for taxpayers in traditionally and customarily tipped industries, regardless of whether they itemize. The new deduction is available to taxpayers who receive qualified tips in occupations listed by the IRS as customarily and regularly receiving tips on or before December 31, 2024 . Qualified tips are voluntary cash or charged tips received from customers or through tip sharing. The maximum annual deduction is $25,000, and the deduction for self-employed taxpayers may not exceed your net income before the deduction from the trade or business in which the tips were earned. You must include your Social Security Number on the return and file jointly if married to claim the deduction. The deduction phases out with modified adjusted gross income over $150,000 . The deduction applies to employees and self-employed individuals, and qualified tips must be reported on Form W-2, Form 1099, or other specified statement furnished to the taxpayer or reported directly on Form 4137,. Self-employed individuals in a Specified Service Trade or Business under section 199A are not eligible—the same is true for employees whose employer is in an SSTB.Certain employees and self-employed individuals who receive qualified tips may deduct those tips if they are reported on a Form W-2, Form 1099, or reported directly by the individual on Form 4137. Generally, employers and other payers must file information returns with the IRS or SSA in the case of Form W-2, and provide statements to taxpayers showing certain cash tips received during the year and the tip recipient's occupation .Workers who receive overtime will be eligible for a deduction for qualified overtime pay of $12,500 . As with tips, this is a deduction, not an exclusion. The new deduction is effective for 2025 through 2028 for taxpayers who receive qualified overtime compensation—it can be claimed regardless of whether you itemize your deductions. The deductible amount is the bit that exceeds your regular rate of pay—the “half” portion of “time-and-a-half” compensation. Overtime pay must be reported on a Form W-2, Form 1099, or another specified statement furnished to the taxpayer. You must include your Social Security Number on the return and file jointly if married to claim the deduction. The deduction phases out for taxpayers with modified adjusted gross income over $150,000 .Certain individuals who receive qualified overtime compensation may deduct the qualified overtime compensation that is reported on a Form W-2 or Form 1099. Again, employers and other payers are required to file information returns with the IRS or the SSA, as applicable, and to provide statements to taxpayers showing the total amount of qualified overtime compensation paid during the year .provides penalty relief from the new information reporting requirements for cash tips and qualified overtime compensation under OBBBA to employers and other payers for failing to file correct information returns and to provide correct payee statements to employees and other payees.The deductions for tips and overtime are two of four new deductions under OBBBA that are largely referred to by the administration by their popular monikers: No Tax on Tips, No Tax on Overtime, No Tax on Car Loan Interest, and No Tax on Social Security.when you file your 2025 tax return in 2026. The final version of Schedule 1-A hasn’t been released yet, but you can take a look at the draft version The IRS has indicated that they will issue additional guidance for individual taxpayers on how to claim deductions for qualified tips and qualified overtime compensation when they file their 2025 tax returns.—that way, the information you need will land in your email inbox each Saturday morning with no additional work on your part.
OBBBA Tax Deductions New Tax Deductions Under OBBBA Reporting Requirements Under OBBBA Tax Tip Deduction Overtime Deduction IRS Guidance For OBBBA
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