2025 Reporting Relief for OBBBA Tips and Overtime

On Nov. 5, the IRS provided transition relief, effectively turning off the new reporting requirements enacted as part of the new deductions for qualified tips and qualified overtime compensation. The relief is available for 2025 only.

Background

Generally, payments of gross income over a certain threshold are subject to information reporting on Forms 1099-MISC, “Miscellaneous Information,” or 1099-NEC, “Nonemployee Compensation.” Employers also are required to report wages, including tips and overtime, on Form W-2, “Wage and Tax Statement.” Payments reported on Form 1099-K, “Payment Card and Third Party Network Transactions,” also could include tips. However, prior to the OBBBA, separate reporting of overtime was not required, only certain tips were separately reported, and an employee or payee’s occupation was not reported.

For 2025 through 2028, the OBBBA added new deductions for qualified tips under Section 224 and qualified overtime compensation under Section 225. Qualified tips are cash tips received by an individual in an occupation that customarily and regularly received tips on or before Dec. 31, 2024, as provided by the secretary of the U.S. Department of the Treasury. Proposed regulations recently were published providing rules regarding qualified tips and identifying occupations that customarily and regularly receive tips. For purposes of Section 225, qualified overtime compensation is overtime compensation under section 7 of the Fair Labor Standards Act of 1938.

Additionally, the OBBBA added new reporting on Forms W-2, 1099-NEC, and 1099-K to allow individuals to claim the deductions under Section 224 for qualified tips. For 2025 through 2028, employers and payers must report qualified tips and the occupation of the payee on information returns and payee statements. Also, for 2025 through 2028, the OBBBA added new reporting on Forms W-2 and 1099-NEC to allow individuals to claim the deduction for qualified overtime compensation under Section 225.

For payments made after 2025, the OBBBA raises the reporting threshold for Forms 1099-MISC and 1099-NEC from $600 to $2,000. The OBBBA also effectively repeals the lower reporting threshold for Form 1099-K enacted in 2021, meaning that reporting is required only if the 200-transaction and $20,000-in-payments threshold is satisfied.

Crowe observation

Higher reporting thresholds will offset some of the increased reporting burden for filers making nonemployee payments of qualified tips and qualified overtime.

Section 6721 imposes a penalty for failure to timely file correct information returns with the IRS and Section 6722 imposes a separate penalty for failure to furnish correct information returns to payees.

Notice 2025-62

The notice provides transition relief from information reporting penalties for 2025 for taxpayers required to file information returns with respect to qualified tips or qualified overtime compensation. For qualified tips, the relief effectively waives the requirement to separately report cash tips as defined in Section 224(d)(1) and the occupation of the payee. For qualified overtime compensation, the relief effectively waives the requirement to separately report the portion of payments that are qualified overtime compensation under Section 225(c).

The relief only applies if the filer files and furnishes complete and correct information statements and the aggregate amount reported includes the correct amount of qualified tips and qualified overtime compensation.

While the relief effectively turns off special reporting for 2025, the notice encourages employers and other payers to provide individuals with information to allow them to determine whether they are eligible to claim the deductions.

Looking ahead

Initially, the 2025 effective date for Section 224 and Section 225, along with the new reporting requirements, looked to present significant implementation issues for employers and payers. Recognizing these concerns, the IRS provided broad relief for 2025 by waiving penalties for failure to comply with the new reporting requirements. However, 2026 payments subject to the new deduction and reporting rules will begin soon and it is unclear how employers and payers are going to be able to implement changes for 2026 without more guidance in the very near future. To prepare, employers and payers should consult with their tax advisers and payroll providers to review existing reporting processes and consider what they might need to change to comply with new reporting requirements for qualified tips and qualified overtime compensation.