Employment Law Update: IRS Provides Some Penalty Relief to Employers Navigating Tips and Overtime
Date: November 6, 2025
By:
Randi K. Hyatt
As a reminder, under the OBBB, employees who receive qualified tips may deduct those tips that are reported on their Form W-2. Employees who receive qualified overtime compensation may deduct the qualified overtime pay reported on their Form W-2.
Employers will not (yet) be penalized for failing to provide a separate account for amounts designated as cash tips and/or the job of the person who receives the tips. Nor will employers be penalized for failing to separately identify the total amount of qualified overtime compensation that they have earned. This relief is only for tax year 2025 and will apply only if the person/entity required to make the return or statement prepares and submits a corrected return or statement.
Recognizing that employers will likely not have the systems in place yet for the information required by OBBB to be reported or correctly filed with the IRS, this grace year is now in effect. Indeed, the IRS has confirmed it will not be updating Forms W-2 or 1099 for tax year 2025 to accommodate the OBBB-related changes. The 2025 tax year will be considered a transition period for IRS enforcement and administration of the new cash tip and qualified overtime compensation reporting.
Even with this penalty relief in place, employers should endeavor to provide employees who are in a tipped occupation with the occupation codes and separate accountings of cash tips so those employees can claim the qualified tip deduction for 2025. Employers are encouraged to do the same with separate accountings of overtime compensation, so the employee has the information available to claim that deduction for 2025.
Whiteford’s Labor and Employment Law attorneys are available to assist with your questions on these evolving requirements.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.