The U.S. Department of the Treasury and Internal Revenue Service announced penalty relief Monday for employers and payors facing new federal requirements to report cash tips and qualified overtime compensation on tax forms for 2025. The guidance, detailed in Notice 2025-62, treats the year as a transition period under the One, Big, Beautiful Bill Act, or OBBB, signed into law July 4, 2025, by President Donald Trump.
The relief shields businesses from fines for not separately listing tip amounts, recipient occupations or overtime totals on Forms W-2 and 1099, provided the overall filings remain accurate and complete. This applies solely to returns filed in early 2026 for calendar year 2025 earnings. The IRS confirmed last month that these forms will carry over unchanged from 2024 designs, lacking dedicated fields for the OBBB additions.
Employers must still include all tips and overtime in aggregate wage boxes, such as Box 1 on Form W-2 for federal taxable wages. Failure to do so could trigger standard penalties under sections 6721 and 6722 of the Internal Revenue Code, which range from $60 to $310 per incorrect form depending on timing and intent. The transition acknowledges practical hurdles: Many payroll systems lack updates for the breakdowns, and occupation codes — three-digit identifiers from the Standard Occupational Classification system — require new tracking for tipped roles like waitstaff or bartenders.
The OBBB introduces above-the-line deductions to exclude certain tips and overtime from taxable income, effective through 2028. For tips, eligible workers — employees or self-employed individuals in qualifying occupations — can deduct up to $25,000 annually in “qualified tips,” defined as voluntary cash or credit-card gratuities reported on Form W-2, Form 1099 or Form 4137 for unreported tips. Qualifying occupations include servers, delivery drivers and casino dealers, as outlined in proposed regulations issued September 22, 2025.
Qualified overtime compensation covers the premium portion of time-and-a-half pay, such as the extra 50% above regular hourly rates for hours exceeding 40 per week under the Fair Labor Standards Act. A worker earning $20 per hour would deduct only the $10 premium per overtime hour, not the full $30 rate. Self-employed individuals qualify if they meet similar overtime thresholds in their trade or business. Deductions phase out for adjusted gross incomes above $100,000 for singles or $200,000 for joint filers.
While penalties are waived, the IRS urges employers to voluntarily share the details with workers through secure portals, supplemental statements or Box 14 on Form W-2, labeled “Other.” This aids employees in claiming deductions when filing 2025 returns next spring. Additional instructions for individuals, including deduction worksheets, are expected before the January 31, 2026, deadline for W-2 issuance. Payroll providers like ADP recommend testing systems now for 2026 compliance, when forms will include dedicated boxes.
In Southern Maryland, where tourism drives seasonal service jobs, the changes could deliver tangible relief to tipped staff at waterfront eateries from Solomons in Calvert County to Leonardtown in St. Mary’s. The region’s 150,000 combined residents in Calvert, Charles and St. Mary’s counties include thousands in hospitality, with median hourly wages for waiters hovering at $12.50 plus tips, per state labor data. Maryland’s tip credit allows employers to pay tipped workers a base of $3.63 per hour toward the $15 minimum wage, provided tips bridge the gap.
Local restaurants, such as those along the Patuxent River or in La Plata’s historic district, often rely on summer crowds from nearby naval bases and weekenders from Washington. A server averaging $500 weekly in tips could save $1,200 in federal taxes at a 24% bracket, assuming full qualification. Overtime deductions benefit manufacturing and construction workers in Charles County’s industrial parks, where shifts frequently exceed 40 hours amid shipbuilding demands at the Navy’s Indian Head facility. The Southern Maryland Chamber of Commerce noted in July that OBBB provisions align with regional pushes for wage supports, potentially boosting disposable income for 8% of the workforce in food service.
Historically, tip reporting has relied on employee self-tracking via Form 4070 logs, with employers allocating charged tips monthly. The OBBB expands this to mandate occupation disclosure for deduction eligibility, drawing from a 2023 IRS pilot in high-tip industries. Overtime rules build on FLSA definitions but add tax incentives to encourage reporting, addressing under-the-table practices estimated to cost the Treasury $10 billion yearly in lost revenue pre-OBBB.
For self-employed gig workers, like DoorDash drivers in Prince Frederick, deductions require Schedule C attachments showing tip income. The AICPA has requested safe harbors for good-faith errors in 2025 filings, citing payroll software lags. Tax professionals in Waldorf advise clients to retain tip jars and timecards as proof, especially since audits may rise post-deduction claims.
The OBBB, or H.R. 1 in the 119th Congress, passed with bipartisan backing for its worker-focused cuts, alongside senior and car loan relief. It sunsets in 2028 unless extended, prompting early planning. Southern Maryland filers can access free VITA sites at community colleges like the College of Southern Maryland starting February 2026, where volunteers will guide OBBB claims. As enforcement ramps up in 2026, businesses face $290 penalties per miscoded form, underscoring the one-year grace.
This guidance follows September’s proposed regs clarifying “customarily tipped” jobs, excluding managers or back-of-house roles without direct customer contact. For overtime, it specifies inclusion of bonuses tied to extra hours but excludes compensatory time off. Workers in St. Mary’s crab houses or Calvert marinas stand to gain most, where tips from boating charters often top $1,000 monthly in peak season.