❓WHAT HAPPENED: The Internal Revenue Service (IRS) and the Department of the Treasury announced penalty relief for employers regarding new reporting requirements on cash tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBB) for the 2025 tax year.
👤WHO WAS INVOLVED: The IRS, the Department of the Treasury, and employers, particularly in tipped industries such as hospitality.
📍WHEN & WHERE: The announcement applies to the 2025 tax year and was made following the signing of the OBBB into law in July 2025.
💬KEY QUOTE: “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 the OBBB.” – IRS Official Release
🎯IMPACT: Employers will not face penalties for failing to meet the new requirements in 2025, but full enforcement will begin in 2026.
In a move to ease burdens on businesses, the Internal Revenue Service (IRS) and the Department of the Treasury have granted penalty relief for the 2025 tax year for employers regarding new reporting requirements on cash tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBB). Signed into law by President Donald J. Trump in July 2025, the OBBB mandates that employers report specifics on cash tips and qualified overtime pay using forms like the W-2 and 1099.
With many companies—especially in service sectors reliant on tips—still scrambling to update their processes and paperwork, the IRS has labeled 2025 a grace period. During this time, no fines will be imposed for shortcomings in compliance.
Specifically, employers won’t be penalized for not isolating cash tips in reports, failing to note the occupations of tip earners, or leaving out aggregate qualified overtime figures for staff. To support workers’ deduction claims, the IRS urges businesses to share details like job codes and itemized tips or overtime through digital platforms or simple written notices.
In an official statement, the IRS explained: “Forms W-2 and 1099 for tax year 2025 will not be updated to account for the OBBB-related changes. Therefore, 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 the OBBB.”
This waiver is limited to 2025. From 2026 onward, full penalties will apply for non-adherence to the reporting rules. The IRS also plans to release further instructions to assist filers in deducting eligible tips and overtime when submitting their 2025 returns next year.
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