The IRS issued welcome penalty relief this week for the One Big Beautiful Bill Act's new information reporting requirements, acknowledging what practitioners already knew: the reporting infrastructure simply isn't ready. Notice 2025-62 provides relief from penalties under Sections 6721 and 6722 for employers and payors who fail to separately report cash tips and qualified overtime compensation for tax year 2025. This relief applies only if you otherwise file complete and correct returns, making 2025 effectively a transition year for these requirements.
The practical reality is that Forms W-2 and 1099 won't be updated for 2025 to accommodate these OBBBA changes. The IRS recognizes that most employers lack both the information and the systems needed to comply with the new reporting mandates for qualified tips and overtime. While penalty relief doesn't require you to provide the detailed information, the IRS is encouraging practitioners to help clients make this data available to employees through online portals, supplemental statements, or Box 14 of Form W-2 for overtime compensation. This voluntary approach allows employees to claim their deductions even without formal reporting on the face of information returns.
Your hospitality and retail clients need guidance on the qualified tips deduction, which allows employees and self-employed individuals to deduct up to twenty-five thousand dollars in voluntary cash or charged tips. The deduction phases out for taxpayers with modified adjusted gross income exceeding one hundred fifty thousand dollars, or three hundred thousand for joint filers. For self-employed clients, the deduction cannot exceed net income from the business generating the tips. Employers should be identifying occupation codes for tipped employees to facilitate these claims.
The qualified overtime deduction presents similar planning opportunities for clients in industries with significant overtime work. Employees can deduct the premium portion of overtime pay that exceeds their regular rate, up to twelve thousand five hundred dollars annually or twenty-five thousand for joint filers, subject to the same phase-out thresholds. This applies to overtime required under the Fair Labor Standards Act and reported on Forms W-2 or 1099.
Beyond OBBBA compliance, several other issues demand attention as year-end approaches. Despite a temporary reprieve, beneficial ownership information reporting is resurfacing as states like New York push forward with their own transparency acts. The panic over Corporate Transparency Act compliance may have subsided federally, but state-level requirements could catch clients off guard.
Cybersecurity remains critical, particularly as employees represent the weakest link in most firms' defenses. With tax season approaching and government shutdowns creating additional uncertainty, reinforcing cyber protocols protects both your practice and client data. Year-end planning should also address traditional strategies like timing fixed asset purchases, reviewing entity structures, and harvesting tax losses where appropriate.
The government shutdown hasn't stopped Treasury and IRS personnel from pushing forward with OBBBA implementation, as these workers are classified as essential despite the furlough. Additional guidance for individual taxpayers claiming these deductions is expected before filing season begins. Until then, focus on educating clients about documentation requirements and ensuring they track qualified tips and overtime separately throughout the year to support their 2025 deductions.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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