IRS Updates on "No Tax on Overtime or Tips"

On November 5, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) announced special penalty relief for employers and payors regarding new information reporting rules for cash tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBBA) for tax year 2025. During this transition period, employers and payors will not be penalized for failing to separately report cash tips or qualified overtime compensation, provided that otherwise complete and correct returns are filed.

The IRS recognizes that most employers and payors do not yet have the systems or procedures in place to comply with these new requirements, and official tax forms will not be updated for these changes until after 2025. As a result, tax year 2025 will be treated as a transition period, giving businesses time to adapt to the new reporting standards.

Although not required for penalty relief, the IRS encourages employers and payors to provide employees and payees with detailed information on cash tips and overtime compensation. This will help individuals claim new deductions available for qualified tips and overtime when filing their 2025 tax returns. Additional guidance for individual taxpayers is expected in the future.

This announcement marks a significant step in implementing the OBBBA’s provisions, aimed at easing the transition for employers and ensuring taxpayers have the information needed to benefit from new deductions on tips and overtime compensation.

Read the announcement here for more details.

If you need assistance implementing changes as a result of the OBBBA, contact us.

Source: www.irs.gov