If your business employs tipped workers—especially in hospitality, food service, or personal care—there’s important news from the IRS that could ease your reporting burden for tax year 2025.
Quick Summary
- IRS won’t penalize employers for missing new tip/overtime reporting in 2025
- Relief applies only if returns are otherwise complete and correct
- Full compliance required starting in 2026
- No new IRS forms for 2025—use existing formats
What’s Changing Under H.R. 1?
The One Big Beautiful Bill Act (H.R. 1, P.L. 119-21) introduced new reporting requirements for employers of tipped employees. Starting in 2025, businesses are expected to:
- Separately report cash tips
- Separately report qualified overtime compensation
- Include the occupation of the tipped employee on IRS forms
These rules apply to tax years 2025 through 2028, but the IRS has issued Notice 2025-62, granting transitional relief for 2025.
What Does IRS Notice 2025-62 Actually Say?
For calendar year 2025, employers will not be penalized under IRC §§ 6721 or 6722 for failing to:
- Separately report cash tips and qualified overtime
- Include the occupation of the tipped employee
This relief applies only if the employer otherwise files a complete and correct return or statement. The IRS also confirmed that no new forms will be issued for 2025, which is why the relief is limited to that year.
What Counts as a Tip?
Tips include:
- Cash left by customers
- Credit card tips
- Tips shared through tip pools
- Service charges distributed to employees
Tips do not include:
- Hourly wages
- Bonuses
- Fixed service fees retained by the employer
What Is “Qualified Overtime Compensation”?
This refers to overtime wages that meet the criteria for the new deduction under H.R. 1—typically time-and-a-half pay for nonexempt employees under the Fair Labor Standards Act (FLSA).
What’s the Timeline?
Here’s how the reporting requirements roll out:
- In 2025, employers are granted penalty relief. You’re not required to separately report tips, overtime, or occupation details—provided your returns are otherwise complete and correct.
- From 2026 through 2028, full compliance is mandatory. Employers must report these items separately on IRS forms.
- In 2029, the provision expires unless Congress extends it.
How This Impacts Your Payroll Team
If you run a restaurant and your servers earn cash tips plus overtime during holiday rushes, you won’t need to break those out on 2025 W-2s—but you will in 2026. Most payroll systems don’t yet support these breakout fields, so this relief gives you time to upgrade without penalty.
Action Items for Employers
- Review your payroll system’s capabilities
- Flag tip and overtime tracking for 2026
- Train HR and finance teams on new reporting categories
- Bookmark IRS Notice 2025-62 for reference
- Check with your payroll provider (e.g., ADP, Gusto, Paychex) for 2025 readiness and 2026 roadmap
Who’s Affected?
This relief is especially relevant for:
- Restaurants, bars, and cafes
- Salons, spas, and personal care businesses
- Hotels and hospitality employers
- Any business with tipped employees and variable overtime
Why This Matters
The IRS is modernizing how tip income and overtime are tracked. This relief gives employers time to upgrade systems and avoid penalties—but only for one year. If you wait until 2026, you’ll be playing catch-up.
Bottom line:
You’ve got a one-year grace period—but don’t wait. Use 2025 to prepare your systems, train your teams, and ensure smooth compliance when the full rules kick in for 2026.