• New guidance from the Treasury Department and IRS provides penalty relief to employers for tax year 2025 for failing to satisfy the new requirements for reporting cash tips and overtime compensation under 2025’s comprehensive budget bill.
• The guidance gives employers relief with respect to the transition period of the 2025 tax year to gather the correct information without penalty.
• The grace period does not extend beyond the 2025 tax year.

The guidance states that employers will not face incorrect information return penalties for failing to provide a separate accounting of cash tips or the occupation of the employee receiving tips. Employers also will not face penalties for failing to separately provide the total amount of qualified overtime pay. This relief applies only to information returns, such as Form W-2, filed for tax year 2025 and only to the extent that the employer otherwise files a complete and correct tax statement.

The IRS noted that Forms W-2 and 1099 for tax year 2025 will not be updated to account for the changes contained in the 2025 budget bill. The IRS encouraged, but did not require, employers to give tipped employees the occupation codes and separate accountings of cash tips to facilitate employees’ claims of the deduction for qualified tips for tax year 2025. Likewise, it encouraged, but did not require, employers to give employees a separate accounting of overtime pay, so employees can claim a deduction for qualified overtime pay for tax year...

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