IRS Provides Relief on Reporting Qualified Tips and Overtime
The One Big Beautiful Bill Act (OBBBA) added many tax deductions for individuals, two of these being deductions for qualified tips (in general, cash tips received by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024) and qualified overtime (in general, compensation paid to an individual that is in excess of the regular rate).
Before tax year 2025, all tips and overtime were reported as ordinary wages or non-employee compensation on Forms W-2 or 1099-NEC, respectively, and thus were taxed at ordinary income tax rates. OBBBA changed this by allowing a tax deduction up to $25,000 for tips and $25,000 for overtime, assuming certain requirements are met.
Even though this deduction is beneficial for individuals that meet the requirements, it adds additional hardship on payroll departments to report them on the Forms W-2 or 1099-NEC as there is not a line specifically for this. To accommodate this, the IRS issued Notice 2025-62 stating penalties will be waived if employers omit reporting tips and overtime on Forms W-2 or 1099-NEC if the following are met:
- Forms are otherwise complete and correct
- Tips and overtime are included in the aggregate amounts
- Employees are aware of the amount of tips and overtime that is included in the aggregate totals
Before the notice, it would have been very difficult to be compliant with reporting tips and overtime to employees. Now it will be a little bit easier.
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