On November 5, the IRS and Department of the Treasury (Treasury) issued guidance providing penalty relief for new information reporting requirements related to qualified tips and overtime compensation under the One Big Beautiful Bill Act (OBBBA). The guidance offers relief from penalties for failing to file correct information returns or furnish correct payee statements. This relief applies only to tax year 2025.
Background
Signed into law on July 4, OBBBA includes two tax relief provisions aligned with President Trump’s campaign pledges — eliminating tax liability from tips and overtime earnings. The “no tax on overtime provision” offers a deduction of up to $12,500 for individuals (or $25,000 for joint returns) for qualified overtime pay. Notably, the law requires employers and other payors to file information returns with the IRS or the Social Security Administration (SSA) and to furnish statements to taxpayers showing the total amount of qualified overtime compensation paid during the year. These deductions are available for tax years 2025 through 2028.
Guidance
As stated in the guidance, the Treasury and IRS recognize that payors and employers “may not currently have the information required to be reported by the OBBBA or the systems or procedures in place to be able to correctly file the additional information with the Secretary (or the SSA in the case of a Form W-2) and furnish such information to payees and employees.” Accordingly, the guidance designates tax year 2025 as a transition period for IRS enforcement and administration of the OBBBA’s information reporting requirements for qualified overtime compensation.
The guidance states that the IRS will not impose penalties for employers or payors for the following circumstances:
- When an employer required to furnish a written statement fails to separately state the total amount of qualified overtime compensation;
- When an employer required to file a copy of the written statement with the SSA fails to separately report the total amount of qualified overtime compensation;
- When a payor required to file an information return fails to provide a separate accounting of qualified overtime compensation; or
- When a payor required to furnish a written statement fails to identify the portion of payments that are qualified overtime compensation.
Penalty relief applies only to employers or payors that furnish complete and correct returns or statements, which must include “the amount of qualified overtime compensation that would otherwise be required to be separately accounted for on the return or statement in the aggregate amount of payments required to be reported (…) or in the total amount of wages required to be reported.”
The guidance also encourages employers and payors to provide employees and payees with separate accountings of overtime compensation so they can determine whether they qualify for the deduction for qualified overtime compensation for tax year 2025. Employers and payors may make this information available by including it in Box 14 of employees’ or payees’ Form W-2s, through an online portal, in additional written statements, or by other secure methods.
CUPA-HR will keep members apprised of additional guidance from the IRS and Treasury on the “no tax on overtime” requirements from OBBBA.