OBBBA tips & overtime guide › Employer W-2 reporting for 2025
If you run payroll for a restaurant, salon, bar, or any small operation with tipped staff, you have probably heard that the One Big Beautiful Bill Act (OBBBA) gives your employees a new deduction for qualified tips and qualified overtime starting with 2025. The natural worry for the person cutting the checks is: does that mean my W-2s are suddenly wrong unless I separately track and print all of this? For tax year 2025 specifically, the IRS has answered that with a clear no — it granted employers penalty relief because the payroll world could not realistically be ready in time. Here is exactly what the relief covers, what it does not change, and the practical thing to do so your staff can still claim their deduction.
The one-line version: under IRS Notice 2025-62, the IRS will not impose information-reporting penalties for the 2025 tax year on employers who fail to separately report qualified cash tips, the tipped-occupation code, or qualified overtime — as long as you otherwise file complete and correct W-2s and information returns. You are still encouraged (not required) to give employees those figures so they can claim the deduction.
OBBBA created the deductions retroactive to the start of 2025, but the forms and payroll systems that would carry the new fields did not exist yet. The IRS acknowledged this directly: the 2025 Forms W-2 and 1099 were not updated in time to add dedicated lines for a separate accounting of qualified cash tips, a tipped-occupation code, or qualified overtime, and most payroll systems were not built to track and report those amounts. Rather than penalize every small employer for a gap the IRS itself couldn't close in time, Treasury and the IRS designated 2025 a transition year and issued relief. Updated forms and reporting fields are expected for the 2026 tax year, so this "you're off the hook" posture is for 2025 filings only — plan for real, separate reporting going forward.
Update, August 18, 2026 — this is now confirmed and the bridge has ended. The 2026 Form W-2 carries new box 12 code TT (total qualified overtime compensation) and code TP (total cash tips reported to the employer), and box 14 has been split so that new box 14b holds the Treasury Tipped Occupation Code(s). For tax year 2026 and later, separate reporting is required. On August 6, 2026 the IRS published FS-2026-13, which sets out the employer mechanics in detail — including that, under IRC section 225(a), an employee may only deduct qualified overtime compensation the employer actually reported on a properly furnished W-2. See Box 12 code TT: the 2026 reporting rule.
Notice 2025-62 provides relief from two specific penalties for the 2025 tax year:
| Penalty | What it normally punishes | 2025 status |
|---|---|---|
| IRC §6721 | Failure to file correct information returns with the IRS (e.g., the W-2 filed with SSA/IRS). | Not imposed for failing to include the new tip/overtime information for 2025. |
| IRC §6722 | Failure to furnish correct payee statements (the copy you hand the employee). | Not imposed for failing to include the new tip/overtime information for 2025. |
The relief is scoped tightly to the newly required tip and overtime information. It is not a general pass on W-2 accuracy — the notice conditions the relief on you otherwise filing and furnishing complete and correct returns and statements. Wages, withholding, Social Security and Medicare boxes, and everything you already report must still be right.
What the relief does NOT change: tips and overtime are still taxable wages for payroll purposes. The deduction is an income-tax deduction the employee takes on their own return — it does not reduce FICA (Social Security and Medicare) wages, it does not change your payroll tax deposits, and it does not change how you report total wages. "No tax on tips" is a deduction on the employee's 1040, not a reason to stop treating tips as wages on the W-2.
Even with penalty relief, your employees still need the figures to claim the deduction on their 2025 returns, and you are the source of truth for those figures. Notice 2025-62 says employers who choose to make the information available may do so through any reasonable method, and it names several:
Any secure method that reliably delivers the amount works; the IRS did not mandate one format for 2025. The point is that the employee walks away knowing their qualified-tip total and, for hourly staff, their qualified-overtime figure — the two numbers the deduction is built on.
Tracking qualified tips and overtime per employee, per pay period, is the part that has to be right by 2026. TipLedger keeps each worker's qualified cash tips, occupation code, and qualified-overtime premium in one running total, so when the separate-reporting requirement arrives you're producing a number, not reconstructing a year.
See how TipLedger tracks it →