IRS Penalty Relief for 2025: No Tax on Tips and Overtime
The IRS and U.S. Treasury have announced temporary penalty relief for tax year 2025 related to new information-reporting requirements under the One Big Beautiful Bill Act, which introduced the “No Tax on Tips” and “No Tax on Overtime” provisions.
Purpose of the Relief
This relief is intended to give employers, payroll providers, and software platforms additional time to adapt their systems and reporting processes as the rules are implemented.
What Changed Under the New Law
The One Big Beautiful Bill Act created deductions for certain qualified tips and overtime compensation, allowing eligible employees to exclude those amounts from federal income tax, subject to statutory limits and conditions.
To support these deductions, employers are required to track, classify, and report qualifying tips and overtime wages separately through payroll and year-end information returns, including Forms W-2.
Because these requirements are new and operationally complex, the IRS has acknowledged that employers may need additional time to comply.
What the IRS Penalty Relief Covers
For calendar year 2025, the IRS will provide relief from certain penalties related to:
- Inaccurate or incomplete reporting of qualified tips and overtime
- Failure to timely furnish correct information returns to employees
- Failure to timely file correct information returns with the IRS
This relief applies only to penalties and does not eliminate the underlying reporting obligations. The IRS expects employers to make a good-faith effort to comply with the new rules as systems and guidance continue to evolve.
What the Relief Does Not Do
The IRS has emphasized that the following requirements remain unchanged:
- Employers are still required to report wages, tips, and overtime
- Payroll taxes such as Social Security and Medicare continue to apply
- State and local tax treatment may differ
- This relief is temporary and not a permanent waiver
Practical Takeaways for Employers
- Begin identifying qualified tips and overtime under the new rules
- Review and update payroll and HCM systems for separate tracking and reporting
- Maintain documentation and internal controls to demonstrate good-faith compliance
- Expect additional IRS guidance before year-end
How dynamo HCM Is Supporting Clients
dynamo HCM is actively preparing clients for the new reporting requirements related to qualified tips and overtime while leveraging IRS penalty relief for tax year 2025.
Support for Tax Year 2025
For 2025, dynamo HCM will provide automated end-of-year reporting to support employer and employee compliance, including:
- Employer-level summary reports showing totals for tips, overtime pay, and estimated overtime premium
- Employee-level reports detailing overtime pay, estimated overtime premium, and tips when applicable
- Inclusion of estimated overtime premium amounts on 2025 Forms W-2 in Box 14 labeled “Est OT Premium”, with an opt-out option available
All 2025 reports will include IRS-aligned disclosures clarifying that amounts are estimates and that employees are responsible for determining eligibility for any deduction.
Preparing for 2026 and Beyond
Beginning in 2026, dynamo HCM will transition to real-time overtime premium tracking on each paycheck to support more accurate reporting throughout the year. Preparations are also underway for anticipated changes to tips reporting, including separate tracking of voluntary tips and service charges.
Ongoing Guidance and Support
dynamo HCM will continue to:
- Monitor IRS and Treasury guidance
- Configure payroll systems to support evolving requirements
- Review earnings codes and W-2 settings
- Provide clear instructions and ongoing client support
Final Thought
While penalty relief for 2025 provides temporary flexibility, employers should not delay preparation. Early planning and system readiness will reduce risk once enforcement resumes in future years.
If you have questions about how the new “No Tax on Tips” or “No Tax on Overtime” rules apply to your workforce, our team is here to help.
Sources
- IRS Notice 2025-62, Relief from Certain Penalties Related to Information Reporting Required in Connection with No Tax on Tips and Overtime
- IRS Newsroom, Treasury and IRS Provide Penalty Relief for Tax Year 2025 for Information Reporting on Tips and Overtime
