Under the One Big Beautiful Bill Act (OBBBA), codified in IRC §224, new reporting requirements apply to employers and other payors regarding the deduction for qualified tips for tax years 2025 through 2028. Please note there is special transition relief for 2025 reporting year.
1. Information Employers Must Report
A. To the IRS (or SSA):
- Employers must file information returns that include:
- The total amount of cash tips received by each employee that are reported under section 6053(a).
- The occupation of the employee receiving the tips, as defined by the IRS list of occupations that “customarily and regularly” received tips on or before December 31, 2024.
B. To Employees:
- Employers must furnish written statements (typically Form W-2) to employees that include:
- The total amount of cash tips reported by the employee.
- The occupation of the employee as described above.
C. For Non-Employee Recipients:
- For non-employee recipients (e.g., independent contractors), similar information must be reported on Forms 1099, including the amount of cash tips and the recipient’s occupation.
2. Relevant Forms and Reporting Mechanisms
- Form W-2 (for employees):
- For tax years 2026–2028, the OBBBA requires that Form W-2 include:
- The total amount of qualified tips (Box 12, code TP on the draft 2026 form).
- The occupation code of the employee (Box 14b on the draft 2026 form).
- For 2025, Forms W-2 will not be updated to reflect these changes; the new reporting boxes and codes will first appear on the 2026 Form W-2 (due February 1, 2027, for calendar year 2026).
- For tax years 2026–2028, the OBBBA requires that Form W-2 include:
- Form 1099 (for non-employees):
- Similar requirements apply for reporting cash tips and occupation for non-employee recipients.
- Form 4137:
- Employees who receive tips not reported to their employer may report them directly on Form 4137.
3. Compliance Obligations
- Information Returns:
- Employers must file information returns with the IRS (or SSA for W-2s) that include the required tip and occupation information.
- For non-employees, payors must file Forms 1099 with the IRS including the same information.
- Payee Statements:
- Employers and payors must furnish statements to employees and non-employee recipients with the required information.
- Recordkeeping:
- Employers should maintain records of cash tips and the occupation of each recipient to comply with the reporting requirements.
- Eligibility:
- Only tips received in occupations listed by the IRS as “customarily and regularly” tipped on or before December 31, 2024, are eligible.
4. Transition Relief and Special Rules for 2025
- Penalty Relief:
- For tax year 2025, the IRS will not impose penalties under sections 6721 (failure to file correct information returns) or 6722 (failure to furnish correct payee statements) for failing to separately report:
- The amount of cash tips.
- The occupation of the tip recipient.
- This relief applies only if the employer otherwise files and furnishes a complete and correct return or statement (i.e., the aggregate amount of payments is reported as required).
- For tax year 2025, the IRS will not impose penalties under sections 6721 (failure to file correct information returns) or 6722 (failure to furnish correct payee statements) for failing to separately report:
- Best Practices (Not Requirement) for 2025:
- Employers are encouraged, but not required, to provide employees with the occupation codes and separate accounting of cash tips for 2025, to help employees claim the deduction.
- Employers may provide this information in box 14 of the W-2 or a supplemental statement to the W-2 delivered through a portal or other secure methods.
- In practice, employees may be upset if they are unable to take the deduction in 2025 because the tips amounts weren’t properly reported to them.
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