Dive Brief:

• The American Institute of Certified Public Accountants is asking the Internal Revenue Service for additional guidance and “safe harbor” protections for employers and their workers related to how they report tips and overtime on W-2s and other filings, in order to qualify for deductions temporarily allowed by the fiscal law President Donald Trump signed in July, according to a Friday letter signed by AICPA Tax Executive Committee Chair Cheri Freeh. 
• While the IRS last month released guidelines on newly established Internal Revenue Code sections 224 and 225 that allow tip-related tax deductions for workers in eight sectors, including hospitality and beverage and food service, the AICPA’s comment letter signals continued uncertainty around how the new rules will be implemented.
• “Employers and payors are unsure of how to satisfy information reporting required under section 224 and section 225 in order for individuals to be eligible for these deductions,” Scott Klein, senior manager, AICPA Tax Policy & Advocacy said in a statement in a press release on the letter. “The AICPA urges the IRS to accept our recommendations and provide this much needed clarification.”

Dive Insight:

Formally known as the One Big Beautiful Bill Act, the massive law extended many expiring provisions in the Tax Cuts and Jobs Act enacted during President Trump’s first administration while also paving the way to deliver a version of his campaign promise to eliminate taxes on tips and overtime. 

However, exactly how those tax deductions will work in practice is complicated, raising questions for employers and workers alike. For example, not all jobs are covered by the new tip law, the maximum annual deduction related to tips is $25,000, and the tips provision are effective for only four years, from 2025 through 2028. 

Overtime reporting could also represent a big shift for companies. Until the qualified overtime deduction became effective this year, companies were not required to separately state overtime on their workers’ W-2 forms, Klein said. The requirements affect employers with employees receiving overtime pay under the Fair Labor Standards Act but there are questions around whether the reporting requirements will apply to other situations. 

“It is not clear yet whether the qualified overtime deduction is limited to those employees who receive overtime under FLSA. For example, employees may receive overtime under a different system such as a collective bargaining agreement, or the Railway Labor Act.  We recommend that employers keep a careful account of the rates and systems that apply for the hours worked by each employee,” Klein said in an email Tuesday. 

Amid this uncertainty, the IRS has said they would not impose penalties on employers who make a “good faith effort” to report qualified tips and overtime for the 2025 tax year, but the AICPA is pushing for safe harbor protections during the transition period while W-2s and 1099s are revised to accommodate the additional information needed on the tips and overtime. 

“Our letter advocates for key safe harbors that employers can rely on for 2025 where they may not be able to timely segregate qualified tips or qualified overtime compensation for the 2025 tax year,” Klein said.