New England Biz Law Update
The IRS has announced temporary penalty relief for employers as they adapt to new reporting requirements for tips and overtime pay under the One Big Beautiful Bill Act (OBBBA).
In Notice 2025-62, the agency confirmed that for tax year 2025 it will not impose penalties on employers or other payors who fail to separately report new data elements – including cash tips, occupation codes for tipped workers, and amounts of qualified overtime compensation – as long as other information and employee statements are accurate and complete.
The OBBBA created new federal deductions for employees who receive cash tips or qualified overtime, requiring employers to provide supporting information on Forms W-2 and 1099.
But the IRS acknowledged that payroll systems and tax forms are not yet configured to collect or display this data, prompting a one-year transition period before full enforcement.
For employers, the relief offers short-term flexibility but signals a coming shift in wage-reporting obligations.
Starting in 2026, the IRS is expected to require full compliance, with penalties for failure to file or furnish correct information under Internal Revenue Code §§ 6721 and 6722.
The change is expected to have particular impact on hospitality, restaurant, and service-sector businesses, where tipping is routine and overtime common.
Employers should treat 2025 as a preparation year: evaluate payroll systems, confirm how tips and overtime are tracked, and coordinate with vendors to ensure future reporting capabilities.
While the notice temporarily limits exposure to federal penalties, employers remain subject to state wage-and-hour laws and should maintain accurate tip and overtime records to comply with both federal and state requirements.
The IRS is expected to issue further guidance and updated form instructions ahead of the 2026 filing season.
