IRS Grants One-Year Relief on New Tip and Overtime Reporting Rules
The IRS released Notice 2025-62 to give employers and payroll providers more time to adjust to certain reporting requirements created by the One Big Beautiful Bill Act (OBBBA). The law introduced two new deductions for employees who receive tips or overtime pay beginning in 2025, and those deductions were expected to rely on new data fields on Forms W-2 and 1099. Those fields have not yet been finalized, and many payroll and point-of-sale systems are not equipped to capture the information. The IRS is treating 2025 as a transition year and will not enforce the new reporting elements until 2026. To help clients, prospects, and others, Klatzkin has summarized the key details below.
Notice 2025-62 Gives Employers a One-Year Transition Period
Under the notice, employers will not be penalized in 2025 if they do not list cash tips, identify the occupation of a tipped employee, or show qualified overtime compensation as a separate amount on Forms W-2 or 1099. These items were originally expected to appear on 2025 forms, but the IRS acknowledged that payroll systems and form updates are still in progress. Employers must still file accurate returns, but the new reporting elements will not be enforced this year. The agency expects employers and payroll providers to use this year to prepare for full reporting in 2026.
The New Deductions Still Apply for 2025
Even with the reporting delay, the underlying tax benefits created by the law remain in place. Employees in occupations that customarily receive tips can deduct up to $25,000 of qualified tips on 2025 returns. Employees who earn qualified overtime can deduct up to $12,500. Both deductions phase out starting at $150,000/$300,000 for single/joint returns. The deductions apply regardless of whether the amounts appear separately on a W-2. It is important to note, though, that these tax benefits are temporary and will phase out in 2028.
Forms W-2 and 1099 Will Not Be Updated for 2025
Updated fields for Forms W-2 and 1099 will not be added until 2026. That means most employees will not see a separate line for cash tips or qualified overtime on 2025 year-end forms. Many pay stubs also group wages and tips together, and overtime pay may appear only as total hours. Employees can still claim the deductions but will need to calculate the eligible amounts. The IRS plans to release final instructions and the completed Schedule 1-A early in 2026 to help taxpayers report tips and overtime and then claim the deduction.
Employers Can Provide Information Voluntarily
Although separate reporting is not required this year, Notice 2025-62 encourages employers to share the information with employees in several ways. Employers can use an online portal, an additional written statement, another secure method, or Box 14 of Form W-2 for qualified overtime. These options are voluntary, but they may help employees determine the amount they can deduct for 2025. Employers that begin tracking these figures now will be in a better position when reporting becomes mandatory in 2026.
Full Reporting Begins in 2026
The IRS expects updated forms and system changes to be ready for use next year. When that happens, employers will need to separately report qualified tips, qualified overtime compensation, and occupation information for tipped employees. Payroll vendors are preparing for these updates, and they are expected to release more information before year-end.
What Can Employers Do Now?
Employers can use 2025 to get internal systems ready for next year’s reporting changes. Tracking cash and charge tips, qualified overtime compensation and hours, and occupation information for tipped employees will make the switch to the new W-2 and 1099 forms much easier in 2026. Providing voluntary summaries at year-end may also help employees calculate deductions, especially if pay stubs do not list these amounts separately.
It is also important to stay in contact with payroll and point-of-sale providers, since most vendors plan to release system updates before the 2026 filing season. Employers will want to review payroll input now to identify any missing data or outdated templates. Addressing those issues early on can reduce the likelihood of corrections or amended forms once the new reporting requirements take effect.
Contact Us
Notice 2025-62 creates a transition year, but the new deductions still apply. Employers that begin preparing now and stay alert for upcoming IRS instructions will be ready for the updated reporting requirements in 2026. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Klatzkin can help. For additional information call 609-890-9189 or click here to contact us. We look forward to speaking with you soon.