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Quick Hits
- New guidance from the Treasury Department and IRS provides penalty relief to employers for tax year 2025 for failing to satisfy the new requirements for reporting cash tips and overtime compensation under 2025’s comprehensive budget bill.
- The guidance gives employers relief with respect to the transition period of the 2025 tax year to gather the correct information without penalty.
- The grace period does not extend beyond the 2025 tax year.
The guidance states that employers will not face incorrect information return penalties for failing to provide a separate accounting of cash tips or the occupation of the employee receiving tips. Employers also will not face penalties for failing to separately provide the total amount of qualified overtime pay. This relief applies only to information returns, such as Form W-2, filed for tax year 2025 and only to the extent that the employer otherwise files a complete and correct tax statement.
The IRS noted that Forms W-2 and 1099 for tax year 2025 will not be updated to account for the changes contained in the 2025 budget bill. The IRS encouraged, but did not require, employers to give tipped employees the occupation codes and separate accountings of cash tips to facilitate employees’ claims of the deduction for qualified tips for tax year 2025. Likewise, it encouraged, but did not require, employers to give employees a separate accounting of overtime pay, so employees can claim a deduction for qualified overtime pay for tax year 2025. Employers can make the information available to their employees through an online portal, additional written statements, or (in the case of overtime compensation) in Box 14 of Form W-2.
Reporting Requirements
Under the 2025 budget bill, workers who customarily and regularly receive tips can deduct up to $25,000 in tips from their income subject to federal income tax starting on January 1, 2025, through December 31, 2028. Businesses must report these tips on Form W-2 for employees and on Form 1099 for nonemployees. The IRS released a list of eligible tipped occupations, including bartenders, waitstaff, cooks, dishwashers, bakers, gambling dealers, dancers, musicians, concierges, hotel housekeeping staff, hairdressers, barbers, massage therapists, and nail technicians.
Meanwhile, workers can deduct up to $12,500 or $25,000, depending on filing status, in overtime pay from their income subject to federal income tax, starting on January 1, 2025, through December 31, 2028. Businesses are required to report qualified overtime compensation on Form W-2 for employees and on Form 1099 for nonemployees.
Next Steps
Employers may wish to become familiar with the new reporting requirements for cash tips and overtime pay and take steps to fully comply with those reporting requirements for tax year 2026. They will not be penalized for not complying with those reporting requirements for tax year 2025. However, the IRS encouraged employers to provide employees with the information needed to facilitate employees’ deductions. Generally, IRS penalties for each incorrect or late Form W-2 can range from $60 to $680 per form.
Ogletree Deakins’ Employment Tax Practice Group will continue to monitor developments and will provide updates on the Employment Tax, Hospitality, Sports and Entertainment, and Wage and Hour blogs as new information becomes available.
This article and more information on how the Trump administration’s actions impact employers can be found on Ogletree Deakins’ Administration Resource Hub.
Michael K. Mahoney is a shareholder in Ogletree Deakins’ Morristown office and chair of the firm’s Employment Tax Practice Group.
This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.
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