Year-end payroll processing is complicated enough without last-minute federal tax changes. If you employ workers who earn tips or overtime, from restaurant servers to warehouse staff to healthcare workers, you’re probably asking “Do I need to overhaul my payroll systems before December 31st?”
The short answer is no. However, there’s critical action you need to take to protect both your business and your employees.
The IRS released Notice 2025-62 on November 6, 2025, providing temporary penalty relief for new reporting requirements under the One, Big, Beautiful Bill Act (OBBBA). While this relief gives you breathing room for 2025, it doesn’t eliminate your responsibility to help employees access new tax deductions they’re entitled to. Without the right information, your employees could miss out on valuable tax savings, and that’s not the kind of year-end surprise anyone wants.
The New Law (OBBBA) Creates Tax Deductions for Tips and Overtime
Starting with the 2025 tax year, employees can claim new deductions for qualified tips and qualified overtime compensation on their individual tax returns. This potentially saves your employees significant tax dollars, but only if they have the documentation to claim these deductions.
The IRS Granted a One-Year Transition Period
The IRS will not penalize employers who fail to separately report tip and overtime amounts on 2025 information returns (like Forms W-2), as long as all other information is complete and accurate. This relief applies only to the 2025 tax year. Beginning in 2026, the IRS will require full compliance using revised forms and updated electronic reporting systems.
Your Responsibility: Voluntary (But Highly Recommended) Employee Documentation
While the IRS won’t penalize you for not modifying your 2025 W-2 forms, they strongly encourage employers to voluntarily provide separate statements or digital records showing:
Total qualified tips received
Total qualified overtime pay earned
Occupation codes (in some cases)
How to Provide This Information (Three Simple Options)
Option 1: Use Form W-2 Box 14
The easiest approach for most businesses is adding this information to Box 14 of your standard W-2 form. Your payroll system likely already supports custom Box 14 entries. Work with your payroll provider to add lines for “Qualified Tips” and “Qualified Overtime” with the corresponding dollar amounts.
Option 2: Create a Supplemental Written Statement
Issue a separate year-end statement to affected employees listing their qualified tip and overtime totals. This can be a simple letter on company letterhead that employees attach to their tax records. Include clear labels, dollar amounts, and your EIN for reference.
Option 3: Digital Employee Portal
If your business uses an online employee portal, post individual compensation summaries there that employees can download and save. This creates a permanent digital record that employees can access when preparing their tax returns.
Which Employees Need This Information?
Focus on employees who received:
Tips: Servers, bartenders, delivery drivers, hairstylists, valets, bellhops, or any employee who received cash tips as part of their compensation
Overtime: Any hourly employee who worked more than 40 hours per week, including production workers, warehouse staff, retail employees, and healthcare workers
Please note: The new provision applies only to non-exempt employees who qualify for overtime under federal labor standards, not all hourly employees paid overtime.
Action Steps Before December 31, 2025
Step 1: Coordinate with Your Payroll Provider Now
Contact your payroll company this week to confirm they can pull separate reports for qualified tips and overtime for 2025. Don’t wait until late December when payroll providers are swamped with year-end processing.
Step 2: Decide on Your Delivery Method
Choose whether you’ll use W-2 Box 14, supplemental statements, or your employee portal. Consider what’s easiest for your HR team and clearest for your employees.
Step 3: Communicate with Employees
Let affected employees know they’ll receive this documentation and explain why it matters. A brief email or bulletin board notice in mid-December helps employees understand what to expect and how to use the information.
Step 4: Keep Records
Maintain copies of whatever documentation you provide. While this is voluntary for 2025, demonstrating good-faith effort to help employees protects you and establishes procedures for mandatory 2026 compliance.
What Happens If You Do Nothing?
The IRS won’t penalize you for 2025 but consider the consequences: Your employees may miss valuable tax deductions they’re entitled to, creating frustration and potential questions down the road. More importantly, you’ll need to implement these reporting systems for 2026 anyway so acting now gives you a trial run without penalty risk.
Without proper documentation, an employee who worked significant overtime all year might leave thousands of dollars in tax savings on the table. Your employees work hard for your business; helping them maximize their tax benefits is both good business practice and good employee relations.
Have Questions About These New Reporting Requirements?
HBK can help you understand how these changes affect your business and what steps you need to take before year-end.
Imagine closing out 2025 knowing your employees have everything they need to claim their entitled tax deductions, your payroll systems are positioned for seamless 2026 compliance, and you’ve avoided the last-minute scrambles that plague so many businesses.
Don’t let your employees miss out on tax savings because of incomplete documentation. Take action now.
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