IRS to Provide Penalty Relief for Reporting Requirements Related to Tips and Overtime

 Posted on November 13, 2025 in Employment Taxes

One of the promises made by Donald Trump during the 2024 presidential campaign was to eliminate taxes on tips and overtime. He delivered on that promise when Congress passed the One, Big, Beautiful Bill Act (OBBBA). This law did not completely eliminate taxes on tips and overtime, but it does allow for certain workers to claim deductions for tips and overtime pay. However, it also created new requirements for employers to report tips and overtime to employees. There has been some confusion about these requirements and the penalties that may apply if they are not met, but the IRS has taken steps to address these issues for the 2025 taxable year.

When addressing changes to tax laws and reporting requirements, employers may need to take steps to change their procedures, and they may need to determine how to respond to potential IRS penalties. An attorney who has a strong understanding of the tax laws that apply to employers and the changes that have been made to the U.S. Tax Code can provide guidance on employment tax issues and the best ways to defend against penalties.

2025 to Be Treated as a Transition Period for Employer Reporting Requirements

Under the OBBBA, certain employees can claim deductions for the cash tips they received throughout the year. These deductions can be claimed by employees who work in occupations that customarily receive tips, as long as those tips are reported on a Form W-2, Form 1099, or a statement provided by an employer. Deductions may also be claimed on tips that were not reported to an employer by an employee but were reported to the IRS on Form 4137. The maximum annual deduction that can be claimed is $25,000, and this deduction phases out for people with modified adjusted gross annual incomes over $150,000.

The OBBBA also allows certain employees to make similar deductions for overtime pay. Employees may deduct the income that exceeds their regular wages when they earn overtime as required by the Fair Labor Standards Act (FLSA). Since this law requires employers to pay employees 150% of their standard wages for time worked in excess of 40 hours in a workweek, employees can deduct the additional 50% of their wages they receive. The maximum annual deduction that can be claimed is $12,500, and this deduction phases out for people with modified adjusted gross annual incomes over $150,000.

To ensure that employees can claim deductions correctly for tips and overtime, the OBBBA requires employers to provide employees with separate accountings of cash tips and overtime pay. These accountings may be included on Forms W-2 or 1099 or in written statements provided to employees. Accountings must also be included in information returns filed with the IRS. Employers who fail to provide the required accountings will be subject to penalties.

Following the passage of the OBBBA, there has been some confusion about what requirements apply to employers. Some employers may have been unable to make the changes required to compile information about employees’ tips or overtime pay. In addition, the IRS will not be updating Forms W-2 and 1099 for the 2025 taxable year to include information about tips and overtime. To address this issue, the IRS has announced that 2025 will be a transition period, and the penalties for non-reporting will not apply to employers for the 2025 taxable year. 

The IRS still encourages employers to provide employees with accountings of cash tips and overtime, if possible, so that the proper deductions can be claimed. This can also help ensure that the proper information will be reported in future tax years so that penalties can be avoided.

Contact Our San Jose Tax Attorney

To address changes to tax laws and avoid potential penalties, employers may need to make changes to the ways they compile data about the wages paid to employees and the tips and overtime pay that employees receive. At John D. Teter Law Offices, our San Jose, CA tax lawyer can provide guidance to employers on their legal obligations. We can also help address any penalties that may apply, working with employers to resolve issues with the IRS and reduce or eliminate their financial losses. Contact us today at 408-866-1810 to set up a consultation.