Notice 2025-62 provides crucial penalty relief specifically for taxable year 2025 regarding new information reporting mandates enacted by Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly referred to as the One, Big, Beautiful Bill Act (OBBBA). This relief addresses potential failures related to implementing the new reporting requirements for deductions related to qualified tips (new Code section 224) and qualified overtime compensation (new Code section 225). The relief targets penalties imposed under section 6721 for failure to file correct information returns and under section 6722 for failure to furnish correct payee statements.

Analysis of Relevant Statutory Law and OBBBA Amendments

The statutory framework governing information reporting has long been codified in several sections of the Internal Revenue Code (Code).

Pre-OBBBA Reporting Requirements Prior law generally required persons engaged in a trade or business to file information returns (with the Secretary or the Secretary’s delegate) and furnish payee statements for certain payments.

Section 6041(a): Mandates filing returns for payments of fixed or determinable income (e.g., salaries, wages, rent) above the applicable threshold, including the amount and recipient identification. Payee statements are required under section 6041(d).
Section 6041A: Imposes similar filing requirements for remuneration paid for services performed in a trade or business above the threshold. Payee statements are required under section 6041A(e). Before OBBBA, the threshold for both sections 6041 and 6041A was $600.
Section 6050W(a): Requires payment settlement entities (PSEs) to report reportable payment transactions. Prior to amendment, the de minimis reporting threshold under section 6050W(e) was $600. Payee statements must be furnished under section 6050W(f).
Section 6051(a) and (d): Requires employers to furnish written statements (Form W-2) to employees showing, among other things, the total wages paid, including tips reported by the employee under section 6053(a), and the amount of income and employment taxes withheld. A copy must be filed with the Social Security Administration (SSA).

OBBBA Information Reporting Changes The OBBBA introduced significant reporting complexity, applicable to taxable years beginning after December 31, 2024.

Reporting Threshold Adjustments: Section 70433 of the OBBBA increased the reporting threshold under section 6041(a) from $600 to $2,000 for payments made between January 1, 2026, and January 1, 2027, with subsequent annual inflation adjustments. The section 6041A threshold was also adjusted to equal or exceed the section 6041(a) amount. Further, section 70432 retroactively amended the section 6050W(e) de minimis threshold for third-party network transactions, requiring reporting only if the gross amount exceeds $20,000 and the number of transactions exceeds 200.
Qualified Tips Reporting (Section 70201(f) amending Sections 6041, 6041A, 6050W, and 6051): To facilitate the new section 224 deduction for qualified tips, the OBBBA added requirements for the separate accounting of cash tips and the reporting of the recipient’s occupation. Specifically:
- Payors must include a separate accounting of reasonably designated cash tips and the occupation described in section 224(d)(1) on information returns (sections 6041(a), 6041A(a), 6050W(a)) and payee statements (sections 6041(d)(3), 6041A(e)(3), 6050W(f)(2)).
- Employers must include the total cash tips reported under section 6053(a) and the occupation described in section 224(d)(1) on the written statement furnished to the employee (section 6051(a)(18)).
Qualified Overtime Compensation Reporting (Section 70202(c) amending Sections 6041 and 6051): To facilitate the new section 225 deduction for qualified overtime compensation, the OBBBA added requirements for the separate accounting of this compensation.
- Employers must include the total amount of qualified overtime compensation (as defined in section 225(c)) on the written statement furnished to the employee (section 6051(a)(19)).
- Payors must include a separate accounting of qualified overtime compensation on information returns (section 6041(a)) and payee statements (section 6041(d)(4)).

Penalties Applicable to Reporting Failures

Failure to comply with these requirements generally subjects payors and employers to penalties.

Section 6721: Imposes a penalty for failure to file a required information return by the due date or failure to include all necessary or correct information.
Section 6722: Imposes a penalty for failure to furnish a required payee statement by the due date or failure to include all necessary or correct information.
Section 6724(a): Provides an exception to these penalties if the failure is shown to be due to reasonable cause and not willful neglect. To qualify for reasonable cause under Regulation § 301.6724-1, the filer generally must establish that significant mitigating factors or events beyond the filer’s control caused the failure, and that the filer acted in a responsible manner both before and after the failure.

Application of Law to the Facts and Conclusion

IRS Rationale for Transition Period

The Treasury Department and the IRS recognize that the new reporting mandates for qualified tips and qualified overtime compensation necessitate significant changes for filers. Prior to the OBBBA, payors and employers were not required to separately account for cash tips, recipient occupation, or qualified overtime compensation on Forms 1099 or Form W-2.

The IRS is aware that payors and employers may lack the necessary data, systems, or procedures to accurately comply with these added information reporting requirements. Given this lack of preparedness and the fact that the IRS has announced that Forms W-2 and 1099 for taxable year 2025 will not be updated to reflect these OBBBA-related changes, the IRS concluded that enforcement during this initial year would be unduly burdensome.

Therefore, the IRS has determined that taxable year 2025 will be regarded as a transition period for the enforcement and administration of the new information reporting requirements for qualified tips (section 70201(f) of OBBBA) and qualified overtime compensation (section 70202(c) of OBBBA).

Specific Transition Relief Granted

Notice 2025-62 provides that for taxable year 2025, the IRS will not impose penalties under section 6721 or 6722 in the following circumstances:

Relief Related to Qualified Tips and Occupations: The penalties will not be imposed if a required filer fails to provide the separate accounting of reasonably designated cash tips or the occupation described in section 224(d)(1) on any of the returns or statements required under section 6041(a) or (d), section 6041A(a) or (e), section 6050W(a) or (f), or section 6051(a) or (d) (filed with the SSA).
Relief Related to Qualified Overtime Compensation: The penalties will not be imposed if a required filer fails to separately provide the total amount of qualified overtime compensation (as defined in section 225(c)) on any of the returns or statements required under section 6051(a) or (d) (filed with the SSA), or section 6041(a) or (d).

Limitations and Practitioner Considerations

It is critical to note that the penalty relief granted is strictly limited to returns and statements related to amounts paid during 2025. Furthermore, the relief only applies to the failure to separately report tips, occupation, or overtime compensation to the extent that the person otherwise files and furnishes a complete and correct return or statement.

Crucially, a complete return or statement must still include the aggregate amount of the payments required to be reported under the applicable Code section. This means the cash tips and qualified overtime compensation must be included in the total amounts reported for wages (section 6051) or aggregate payments (sections 6041, 6041A, or 6050W). The relief simply waives penalties associated with the lack of granularity (the separate accounting and occupation description).

To aid taxpayers in claiming the new deductions, employers and payors are strongly encouraged (though not required for penalty relief) to provide employees and payees with the necessary information, such as occupation codes and separate accountings of cash tips and overtime compensation. This information can be furnished through secure methods, additional written statements, online portals, or, for overtime, potentially Box 14 of Form W-2. Additionally, employers are encouraged to provide information regarding whether the employer’s trade or business is a specified service trade or business as defined in section 199A(d)(2).

Prepared with assistance from NotebookLM.