In Notice 2025-62, released on November 5, the IRS provided temporary relief to employers and payors for failing to comply with certain reporting requirements added to the Internal Revenue Code by the One, Big, Beautiful Bill Act (OBBBA) in conjunction with sections 224 and 225 of the Internal Revenue Code (see prior coverage).  Subsequently, in Notice 2025-69, the IRS provided guidance to employees and payees as a result of the relief provided by the earlier notice to employers and payors.  Under sections 224 and 225 and subject to certain limitations, employees and payees are entitled to deductions for qualified tips and qualified overtime compensation in the amount employers and payors provide on statements furnished to employees and payees.  As part of that regime, the Act added new information reporting requirements that require employers and payors to report qualified tips and qualified overtime compensation to the IRS.  It also requires third party settlement organizations (TPSO) whose gross payments exceed a certain threshold to report qualified tip information to the IRS.

Notice 2025-62

IRS Notice 2025-62 provides relief to employers and payors from penalties for failing to comply with the requirement to report qualified tips and qualified overtime compensation.

This relief was unsurprising, given the IRS’ previous announcement that Forms W-2 and 1099 for the taxable year 2025 would not be updated to account for the OBBBA-related changes and the political importance of these deductions to the administration and lawmakers of both parties.  The notice does encourage employers and payors to provide this information to employees and payees, which would allow employees and payees to make accurate deductions in accordance with the terms of the Act.  However, some employers and payors will likely find it difficult to provide this information, especially if new procedures or systems are needed to track the information required to be provided.  For some businesses, this information is not necessarily available, such as when tips are not captured separately from underlying transaction data by a third-party settlement organization or when state-mandated overtime is not tracked separately from FLSA-mandated overtime.

Notice 2025-69

IRS Notice 2025-69, released November 21, provides guidance to employees regarding how to determine the amount of their deduction(s) under section 224 and/or section 225 for qualified tips and qualified overtime compensation, respectively.  The notice also provides generous transition relief to employees and payees from determining whether they are in a specified service trade or business for purposes of determining whether they receive qualified tips.  (A qualified tip under section 224 must not be received in the course of a trade or business that is a specified service trade or business as defined under section 199A.)  The relief in IRS Notice 2025-69 essentially permits taxpayers to assume this requirement is satisfied due to the lack of regulations defining specified service trade or business for purposes of section 224, and the presumption will remain in effect until January 1 of the calendar year following issuance of final regulations on the issue.  This favorable assumption applies to both employees and non-employees, and appears to apply even to taxpayers for whom it seems clear factually that they are engaged in a specified service trade or business (or are employed by an employer in a specified service trade or business, in the case of employees).  Given the somewhat odd results this limitation in the statute creates, the relief will no doubt be welcomed by many taxpayers.

Regarding the qualified tips deduction, the notice provides that employees may determine the amount based on Social Security tips reported in Box 7 of Form W-2, the total amount of tips on the employee’s Forms 4070, tips voluntarily reported by the employer in the W-2 “other” box, or using certain information on the employee’s Form 4137.  Nonemployees may determine the qualified tips amount based on documentation that “corroborates” the total tips for 2025.  This can include sales receipts or other information documenting the amount of transactions relative to the amount of tips received.

Regarding the qualified overtime compensation deduction, the notice provides that taxpayers may generally use any relevant documentation provided by payors to calculate the applicable overtime premium under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 207.  (The Act defines qualified overtime compensation as that amount which exceeds the payee’s regular pay and is required under 29 U.S.C. § 207.  This is generally the half in time-and-a-half.)  The notice provides several methods of calculating qualified overtime, including, but not limited to:

• if provided, using the separately stated amount of overtime premium from the employer on paystubs or other statements;
• if paid overtime compensation at the one and one-half FLSA rate and that amount is separately stated, multiplying the stated amount by one-third;
• if paid overtime compensation in excess of the one and one-half FLSA rate and that amount is separately stated, multiplying the stated amount by the appropriate fraction to equate the one and one-half FLSA rate;
• if no separate overtime premium is provided, using the regular pay rate and the number of hours exceeding 40 in a workweek to make a reasonable calculation of qualified overtime compensation; or
• if subject to another subsection of 29 U.S.C. § 207—such as public sector or hospital or residential care facility workers who receive overtime based on a work period other than 7 days—using the overtime calculation pursuant to that subsection.

The notice also makes clear that employees who receive compensatory time or comp time in lieu of overtime may claim a deduction with respect to a portion of the pay they receive for compensatory time.

As a reminder, the qualified tips and qualified overtime compensation deductions expire December 31, 2028.