According to a guidance released by the Department of the Treasury and the Internal Revenue Service (IRS) on Wednesday, employers who fail to submit employee tip information as required by the One Big Beautiful Bill (OBBB) may be exempt from penalties.
The OBBB, signed into law by President Trump on July 4, 2025, mandates that employers report details of their employees’ cash tip income and qualifying overtime pay on tax forms.
The new regulation allows eligible tip workers to deduct up to $25,000 in qualified tip amounts from their federal taxable income.
Employers are now required to accurately record employees’ tips and overtime pay to enable employees, as taxpayers, to correctly report the new deduction amounts under the OBBB.
Under OBBB’s provisions, employers need to report detailed information on employee cash tips and qualifying overtime pay on tax forms such as W-2s and 1099s.
However, due to the delayed announcement of the IRS requirements until July 2025, many employers have not had enough time to establish the necessary systems or processes to obtain the required information, making it difficult to comply with the new tax reporting requirements of OBBB.
Furthermore, the IRS standard tax forms have yet to be updated to include these changes.
In light of this, the IRS has decided to treat the 2025 tax year as a transition period, where millions of employers—especially those in the hospitality and other tipping industries—will not be penalized for failing to provide information in line with the new requirements, such as separately reporting cash tips, tip recipients’ occupations, and total eligible overtime compensation for each employee.
The IRS stated in a release, “The W-2 and 1099 forms for the 2025 tax year will not be updated to reflect changes related to the OBBB; therefore, the 2025 tax year will be considered a transitional period for IRS enforcement and management of the new reporting requirements for cash tips and qualifying overtime compensation under OBBB.”
However, for the 2025 tax year, the IRS still encourages employers to voluntarily provide information such as employee occupation codes, details of tips, and overtime pay to assist employees in claiming new tax deductions.
The statement further encourages employers and other payers to maintain separate records of occupation codes and cash tips for employees and recipients (especially those in the tipping industry) so that they can claim qualified tip deductions in the 2025 tax year. Similarly, employers and payers are urged to provide separate records of overtime pay to ensure employees or recipients have the necessary information to claim qualified overtime pay deductions for the 2025 tax year.
It is anticipated that the IRS will fully implement the new provisions starting from the 2026 tax year, requiring employers to separately report cash tips and qualifying overtime pay.
The IRS has also announced that it will issue further guidance to help individual taxpayers understand how to report eligible tip and overtime pay deductions when preparing tax forms for the 2025 tax year.