IRS offers transitional penalty relief under OBBBA

The IRS recently released Notice 2025-62, providing penalty relief for the tax year 2025 in connection with the new reporting requirements established by the One Big Beautiful Bill Act (OBBBA). The law introduced deductions for qualified tips and qualified overtime compensation, along with new reporting obligations for employers and payors. This notice provides relief from penalties under §§6721 and 6722 for failures to file or furnish correct information returns and payee statements, applying only to the 2025 tax year.

New reporting obligations

Notice 2025-62 provides penalty relief for employers and other payors who may not yet be able to properly file or furnish the new detailed information about cash tips and other qualified overtime pay. That means for the tax year 2025 only, employers will not face penalties for: 

• Failure to provide a separate accounting of cash tips or the occupation of the person receiving those tips.
• Failure to separately report the total amount of qualifies overtime compensation.

The key is that the employer or payor must still file and furnish otherwise complete and correct information returns and payee statements such as Forms W-2 or 1099. As long as the rest of the filing is accurate, the IRS will not penalize missing the new breakdowns related to tips and overtime for 2025.

The purpose of the relief

Because many businesses may not have the technology or processes to meet the new standards immediately, the IRS is offering transitional relief for 2025. The agency will not impose penalties for missing or incomplete entries of qualified tip, overtime, or occupation data if the overall return and payee statement are otherwise accurate. This allows payors time to modify reporting systems and educate staff before the rules become mandatory in 2026.

Guidance for employers and payors

Employers should begin testing system upgrades to ensure compatibility with the new requirements. Payors should confirm their software can capture both tip and overtime data by employee occupation. Voluntarily including this data during 2025 is strongly encouraged, even though penalties are suspended, to ensure smoother compliance once the relief period ends. The IRS recommends using secure digital formats when furnishing data to employees and payees to protect sensitive information.

Practical implications for tax professionals

Tax professionals advising business clients should help them identify gaps in current reporting systems. Encourage early adoption of OBBBA reporting practices to minimize risk in 2026. Review existing payroll interfaces and ensure that employees’ occupations are correctly coded. For clients using third-party payroll providers, confirm that vendors are aware of and preparing for these new data fields. Additionally, remind clients that voluntary compliance in 2025 could serve as a valuable trial run for full enforcement next year.

Deduction for qualified tips and overtime

The OBBBA also created new income tax deductions for individuals receiving qualified tips and qualified overtime compensation. Individual guidance on how to claim these deductions will be issued in a future notice. However, preparers should expect that taxpayers will need documentation from their employers reflecting these amounts. Businesses that accurately record and report tips and overtime in 2025 will enable employees to take advantage of these deductions when filing their 2025 tax returns.

Coordination with other reporting rules

The OBBBA’s reporting framework interacts with existing information return systems, including Forms 1099-NEC, 1099-MISC and W-2. Employers must ensure that qualified tip and overtime data align with wage and compensation totals already required by the Social Security Administration and the IRS. Third-party settlement organizations, such as digital payment platforms, must also reconcile transactions that qualify as tips or overtime compensation under the revised thresholds.

Preparing for 2026 enforcement

Although penalties are suspended for 2025, businesses should view this year as a transitional period for compliance. The IRS is expected to increase enforcement in 2026 once systems and instructions are fully updated. Early preparations, such as mapping data fields, revising pay codes and training payroll staff, will help reduce the risk of penalties later. The IRS will likely issue additional technical guidance and form revisions before the 2026 filing season.