The American Institute of CPAs (AICPA) has called on the Internal Revenue Service (IRS) to provide more detailed guidance for employers regarding the 2025 reporting and substantiation requirements tied to new temporary tax deductions for qualified tips and overtime pay.
These deductions are part of the One Big Beautiful Bill Act (OBBBA), which was signed into law by President Donald Trump in July. The legislation temporarily permits individual taxpayers to deduct qualified tips and overtime compensation. To claim these deductions, employers must separately report qualified tips and overtime compensation on information returns such as Form W-2 and Form 1099-NEC.
In a recent letter addressed to both the IRS and the U.S. Treasury Department, AICPA pointed out that current versions of these forms for 2025 do not allow for this specific reporting. The organization noted that “Because the 2025 Form W-2 and Form 1099 do not provide designated fields to report the amount of qualified tips and qualified overtime compensation, or the occupation codes, employers and payors are currently unsure of how to satisfy information reporting as is required under section 224 and section 225 in order for individuals to be eligible for these deductions.”
Additionally, AICPA highlighted concerns about documentation standards: “Additionally, tax return preparers and individuals preparing their own tax returns are unsure which type of alternative documentation they can rely on to support the deductions for qualified tips and qualified overtime compensation.”
The IRS recently announced that there will be no changes made to individual information returns or withholding tables for tax year 2025 under OBBBA. This includes no revisions to key forms such as Form W-2, Form 1099-NEC, Form 1099-MISC, or Form 1099-K.
To address these challenges, AICPA recommended that Treasury and IRS:
– Provide guidance including a safe harbor for businesses during the 2025 tax year that allows alternative methods of reporting and use of alternative documentation.
– Include a safe harbor permitting individuals and tax return preparers to rely on alternate information sources when determining eligibility for deductions. These could include Box 7 of Form W-2; employer-provided details in pay stubs or letters; as well as taxpayer representations like occupation statements, tip sheets, logs of hours worked, or other supporting documents.
Employers seeking clarity await further direction from federal agencies on how best to comply with these new requirements.
