If you run a restaurant, hotel, resort or other hospitality business, the recent release of Public Law 119‑21 (the “OBBBA”) and the resulting IRS guidance in Notice 2025-62 mark important new compliance developments around reporting of tips and overtime pay. While many of the changes will not fully take effect until future years, the Notice gives key transition relief for the 2025 tax year that hospitality employers should understand now. Here's what you need to know—and what you should do.

1. What's Changing: Tips & Overtime Deductions + New Reporting

Under OBBBA, two major new deduction rules and corresponding reporting requirements were added:

• A deduction for “qualified tips” under new Code § 224: cash tips received by employees in tipping occupations (those that customarily and regularly receive tips) on or before December 31, 2024. 

• A deduction for “qualified overtime compensation” under new Code § 225: overtime compensation meeting certain definitions. 

At the same time, the law added new information-reporting obligations for employers/payors: on forms like the 1099/6041, W-2/6051, etc., certain separate amounts must be reported (e.g., cash tips separated out, the occupation of the recipient, amounts of qualified overtime compensation) for taxable years beginning after December 31, 2024. 

For hospitality operators this means: If your business has tipped employees (servers, bartenders, bell staff, etc.) or pays overtime, you will need to be ready to collect and report additional data.

2. Why the Hospitality Industry in Particular Should Pay Attention

• Many hospitality businesses have large tipped-work forces. Under the new rules, cash tips must be separately designated and the “occupation” of the tipped employee recorded for reporting purposes. 

• Overtime pay is common in hotels, resorts, restaurants (especially in busy seasons). The qualified overtime-compensation deduction and corresponding reporting requirement bring new complexity.

• The transition relief in Notice 2025-62 is designed to give businesses a runway. But “transition” does not mean “ignore it” — you still must file and furnish complete and correct returns, even if some of the new data elements can be omitted without penalty for 2025. 

• If your business relies on software, payroll/HR systems, or third-party providers for tip reporting or overtime tracking, you'll want to engage early so your systems can be updated for the new requirements.

3. What Notice 2025-62 Does: Penalty Relief for 2025

Notice 2025-62 provides that for taxable year 2025 only (so, amounts paid in 2025) the IRS will not impose penalties under Code § 6721 (failure to file correct information returns) or Code § 6722 (failure to furnish correct payee statements) for certain failures to report the new required items. Specifically:

• If a payor fails to provide the separate accounting of cash tips or fails to show the occupation of the tipped employee on the information return or statement, for 2025 the penalty won't apply. 

• Similarly, if a payor fails to separately report the amount of qualified overtime compensation (or fails to show it on the furnished statement) on returns/statements for 2025, the IRS will not impose the § 6721/§ 6722 penalties for that omission—so long as the return/statement is otherwise complete and correct. 

Key caveats:

• The relief applies only for taxable year 2025 (i.e., payments made during 2025). 

• The relief only applies if the payor/ employer “otherwise files and furnishes a complete and correct return or statement.” In other words, you can't omit everything; you must still report the aggregate amounts (tips + wages + overtime) that would otherwise be required. 

• Notice 2025-62 does not waive the underlying obligation—the new reporting requirements still apply; the IRS is simply postponing penalty enforcement for the missing new items for 2025. You will need systems in place for full compliance going forward.

4. What Hospitality Businesses Should Be Doing Now

Here are steps you should take in your business to prepare:

a) Inventory your tipped workforce and overtime practices

• Identify employees in “tipping occupations” (servers, bartenders, etc.) whose cash tips you track or manage.

• Review overtime pay practices (which employees get overtime, how it is calculated, etc.).

• Check any third-party tip pooling, third-party settlement organizations (TPSOs) if relevant (e.g., for payment-card tips) and how those are reported.

b) Review your information systems, payroll/HR platforms, and vendor relationships

• Ask whether your payroll/HR system will be able to: separate out cash tip amounts, record the occupation of tipped employees, report qualified overtime compensation separately on returns/statements.

• Engage with your vendors/TPA/payroll providers now—since your systems may need updating for tax year 2026/2027.

• Even though penalties for 2025 won't apply to the new items, you'll want to start collecting data now so you're ready when full compliance is required.

c) Update your internal controls and policies

• Establish procedures for collecting the occupation classification of tipped employees.

• Update how cash tips are designated, tracked, and flagged for reporting purposes.

• Train payroll staff or whoever handles information returns/furnishing to payees so that they know this is a transition year but full compliance begins soon.

• Document your efforts: since the relief is conditional (you must file the otherwise correct return/statement), you'll want to have evidence that you are working toward compliance.

d) Communicate with your employees and payees

• Because the new deduction for qualified tips and qualified overtime may benefit employees/payees, you should consider communicating to them that these changes are coming. Notice 2025-62 encourages employers/payors to give employees/payees additional information (for example via online portal or additional written statement) to help them evaluate whether they can claim the new deductions. 

• While the guidance for individual taxpayers (employees) will be issued later, early awareness is helpful: For instance, employees will need the “occupation code” and separate tip amounts to determine eligibility for the deduction. 

• Consider including a short FAQ for employees: what is a “qualified tip,” what is “qualified overtime,” how this may affect their tax return, etc.

e) Monitor upcoming guidance

• The IRS mentions that additional guidance will be issued addressing how individual taxpayers claim the deductions for qualified tips and qualified overtime compensation. IRS

• Stay alert for IRS forms/ instructions updates: for example, W-2 box changes, Form 1099 changes, etc. The Notice states that for 2025 the W-2/1099 forms will not be updated to incorporate the OBBBA changes—which is why this is a “transition” year. 

5. Key Takeaways for Hospitality Operators

• Think of 2025 as a transition year: you must file and furnish returns and statements for tipped cash payments and overtime wages as usual—but the IRS will not penalize you this year if you omit certain new required items (such as separate tip accounting, occupation, or separate overtime compensation) as long as the return/statement is otherwise complete and correct.

• That said: you should prepare now for full compliance. The new reporting requirements become enforceable (with penalties) starting for years after 2025.

• Because hospitality venues rely heavily on tipped employees and overtime practices, this change is very relevant. Your payroll systems, reporting vendors and internal controls should be aligned now.

• Communicate to employees/payees early so they can prepare for their own deduction opportunities (qualified tips / qualified overtime).

• Engage your accounting/tax/advisory team (or your internal payroll/tax person) now to assess systems, gather data and ensure you aren't caught unprepared.

6. Example Scenario for a Restaurant

Imagine a fine-dining restaurant with 50 servers and bartenders, each of whom receive cash tips, credit-card tips, and overtime when they work late shifts. For 2025 the restaurant should:

• Continue tracking all cash tips paid to employees and aggregate wage/overtime compensation as usual.

• Identify each tipped worker's occupation (e.g., “bartender,” “server”).

• Assess whether the payroll system or third-party service can separately report the “cash tips” and “qualified overtime” amounts (even though omission of those separate amounts in 2025 won't trigger penalties).

• Provide employees with accessible information (via portal, printed statement or email) telling them “this year you may qualify for deduction of qualified tips and qualified overtime — you'll need your occupation code and tip amounts when filing your 2025 tax return.”

• Engage the payroll provider to schedule system upgrades for tax year 2026/2027 so that when the Form W-2 and 1099s are updated you're not caught off-guard.

Final Word

For hospitality operators, the release of Notice 2025-62 is an important heads-up. While the IRS is giving relief for the 2025 year, the underlying changes by the OBBBA are real and forthcoming. By treating this year as a strategic transition, aligning your systems, training your staff and preparing your communications, you'll be positioned for smooth compliance and potentially improved tax outcomes (for your employees) going forward.

If you'd like assistance assessing your tip-reporting system, reviewing your payroll vendor readiness or drafting policy documentation for your team, BLG stands ready to help.

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This article is for general informational purposes and does not constitute tax advice. Operators should consult their tax professional or legal advisor for guidance specific to their situation.