Taxpayers Offered Penalty Relief Regarding Cash Tip, Overtime Reporting: IRS

Employers and taxpayers will be provided penalty relief regarding new information reporting requirements for cash tips and qualified overtime compensation under the One Big Beautiful Bill Act (OBBB), according to a Nov. 5 announcement by the IRS.

The OBBB was signed into law by President Donald Trump on July 4 and includes provisions related to taxes. The IRS had earlier issued relief statements for numerous reporting requirements as part of giving taxpayers time to adjust to the new changes brought about by the act.

According to the OBBB, there are no taxes on tips and overtime compensation. Certain employees and self-employed individuals may deduct qualified tips from Forms W-2, 1099, and 4137. The same applies to qualified overtime compensation.

The agency released Notice 2025-62, along with a statement that said employers and other taxpayers will not be fined for failing to file accurate information returns or providing correct payee statements for the 2025 tax year.

These individuals will also not face penalties for failing to provide a separate accounting of any amounts reasonably designated as cash tips or the occupation of the person receiving such tips, or for failing to separately provide the total amount of qualified overtime compensation.

“Treasury and IRS are aware that employers and other payors may not currently have the information required to be reported under the OBBB, or the systems or procedures in place to be able to correctly file the additional information with the IRS, or SSA in the case of a Form W-2, and provide it to employees and other payees,” according to the Notice. SSA refers to the Social Security Administration.

“Moreover, the IRS has announced that Forms W-2 and 1099 for tax year 2025 will not be updated to account for the OBBB-related changes.”

Due to these changes, tax year 2025 will be considered a transitory period with these allowances.

The no tax on tips provision under OBBB is applicable for 2025 through 2028, the IRS said in an Oct. 24 update.

Workers and self-employed individuals can deduct qualified tips they receive while working in occupations listed by the IRS as customarily and regularly receiving tips, prior to Dec. 31, 2024.

“Maximum annual deduction is $25,000; for self-employed, deduction may not exceed individual’s net income (without regard to this deduction) from the trade or business in which the tips were earned,” the agency said.

“Deduction phases out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).”

The no taxes on overtime pay is also applicable for 2025-2028. The maximum amount that can be deducted is $12,500 for single filers and $25,000 for joint filers.

Similar to the no taxes on tips, deductions for overtime pay also phase out when modified adjusted gross income exceeds $150,000 for single filers and $300,000 for taxpayers filing jointly.

Some states are also in the process of eliminating taxes on overtime pay and tips. Last month, Michigan Gov. Gretchen Whitmer signed a bill that removes state taxes on overtime payments, tips, and Social Security benefits.

Prior to this bill, residents in the state had to pay 4.25 percent in state income taxes on such earnings. The change is expected to save “hundreds of thousands of seniors and working families money on their taxes every year,” Whitmer’s office said.

In addition to Michigan, nine states, including Texas, Florida, and Wyoming, already exempt tips and overtime pay from state taxes.

Meanwhile, the IRS reminded the more than 800,000 paid tax preparers in the country that the 2026 renewal period for preparer tax identification numbers (PTIN) is now open.

“Anyone who prepares or assists in preparing federal tax returns or claims for refunds for compensation must have a valid PTIN and include it on all returns and claims filed with the IRS,” the agency said.

“Also, all enrolled agents, regardless of whether they prepare tax returns, must renew their PTINs annually to maintain their active status. PTINs expire on Dec. 31 of the calendar year for which they are issued. All 2025 PTINs will expire on Dec. 31, 2025.”