Key Takeaway for Business Owners: The IRS has announced temporary penalty relief for tax year 2025, giving employers breathing room as they adapt to new reporting requirements for employee tips and overtime compensation under the One Big Beautiful Bill Act.
Understanding the New IRS Relief
In a significant development for employers nationwide, the Internal Revenue Service issued Notice 2025-62 on November 6, 2025, providing crucial penalty relief for businesses navigating new tax reporting obligations. This relief applies specifically to tax year 2025 and addresses the challenges employers face in complying with recently enacted provisions regarding cash tips and qualified overtime compensation.
What the Penalty Relief Covers
Under this notice, employers and other payers will not face penalties for tax year 2025 if they fail to provide:
- Separate accounting of cash tips reasonably designated as such
- Total amount of qualified overtime compensation as required under new information-reporting provisions
- Occupation codes for employees who received tips
Important caveat: This penalty relief applies only if the employer otherwise files complete and correct tax returns and statements. The relief is specifically limited to the missing tip, overtime, and occupation information.
Background: The One Big Beautiful Bill Act
These new reporting provisions stem from H.R. 1, P.L. 119-21, commonly known as the One Big Beautiful Bill Act. The law introduces deductions for certain tips and overtime pay, creating corresponding reporting obligations for employers. These provisions are effective for tax years 2025 through 2028.
Why Is the IRS Providing This Relief?
The IRS recognized that many employers face practical challenges in meeting these new requirements:
- Limited time to prepare: Many businesses may not have the information systems in place to track and report this data separately
- No updated forms yet: The IRS will not issue new Form W-2 versions for tax year 2025
- Data collection barriers: Employers may not have established processes to capture the required tip and overtime details
- Multiple reporting channels: The information must flow to the IRS, the Social Security Administration, and employees—requiring coordination across systems
What Employers Are Encouraged (But Not Required) to Do
While the IRS is providing penalty relief, it encourages employers to voluntarily provide employees with:
For Tips:
- The 68 occupation codes published by the IRS earlier this year
- Separate accounting of cash tips so employees can properly claim the deduction for tax year 2025
For Overtime:
- Separate accounting of qualified overtime compensation so employees can claim the appropriate deduction
How to Provide This Information:
Employers have flexibility in delivering this information to employees:
- Through an online employee portal
- Via additional written statements
- Through other secure methods
- For overtime compensation specifically, in Box 14 of Form W-2
Planning Ahead: What Happens After 2025?
This penalty relief is temporary and applies only to tax year 2025. Employers should use this transition period to:
- Evaluate current payroll and information systems
- Determine what modifications are needed to track tips and overtime separately
- Establish processes for assigning occupation codes
- Prepare for full compliance requirements beginning in tax year 2026
AICPA Advocacy and Ongoing Developments
The American Institute of CPAs (AICPA) has been actively advocating for clear guidance on these provisions. In October 2025, the AICPA formally requested that the IRS and Treasury provide comprehensive guidance on the reporting and substantiation requirements for qualified tips and overtime pay deductions. This IRS notice represents an initial response to those concerns, with additional guidance expected as implementation continues.
How Virtue CPAs Can Help
Navigating new tax reporting requirements can be complex and time-consuming for business owners. Our team at Virtue CPAs stays ahead of evolving IRS guidance to ensure your business remains compliant while maximizing available benefits.
We can assist you with:
- Compliance assessment: Evaluating your current payroll systems and identifying gaps in tip and overtime tracking
- Strategic planning: Developing implementation strategies for the 2026 tax year when full compliance is required
- Employee communication: Creating clear, accurate communications to help your employees understand these changes
- Year-round tax planning: Ensuring your business takes advantage of all available deductions while meeting reporting obligations
Don’t let changing tax regulations catch you off guard. While the IRS has provided relief for 2025, proactive preparation now will position your business for seamless compliance in future years.
Contact Virtue CPAs Today
- Address: 11675 Rainwater Drive, Suite 150, Alpharetta, GA 30009
- Phone: (678) 952-9001
- Email: info@virtuecpas.com
- Website: virtuecpas.com
Schedule a consultation with our experienced tax professionals to discuss how these new provisions affect your business and what steps you should take to prepare for 2026.
