Treasury
AICPA Urges IRS to Provide Employer Protective Safe Harbor Rules for Tip and Overtime Deductions
In a letter to the Internal Revenue Service (IRS) on Friday, the American Institute of CPAs (AICPA) requested additional guidance and "safe harbor" protections for employers and employees regarding tip and overtime reporting to ensure eligibility for tax deductions temporarily allowed under the One Big Beautiful Bill Act. The letter, signed by AICPA Tax Executive Committee Chair Cheri Freeh, noted that despite the IRS issuing new regulations last month, uncertainties remain regarding implementation details.
Key Points
- The American Institute of CPAs (AICPA) has written to the Internal Revenue Service (IRS) requesting additional guidance and "safe harbor" protections on how employers and their employees should report tips and overtime pay on Form W-2 and other filings, to qualify for deductions temporarily allowed under the fiscal bill signed by President Donald Trump in July. The letter was signed Friday by Cheri Freeh, chair of the AICPA Tax Executive Committee.
- Although the IRS last month issued guidance on new Internal Revenue Code Sections 224 and 225, allowing employees in eight industries, including hospitality, food and beverage services, to claim tip-related tax deductions, the AICPA's comment letter indicates ongoing uncertainty remains in implementing the new rules.
- "Employers and payors are uncertain how to satisfy the information reporting requirements under Sections 224 and 225 to make individuals eligible for these deductions," said Scott Klein, AICPA Senior Manager of Tax Policy & Advocacy, in a press release. "The AICPA urges the IRS to accept our recommendations and provide this much-needed clarification."
In-Depth Analysis
The sweeping law, formally known as the One Big Beautiful Bill Act, extends many expiring provisions from the Tax Cuts and Jobs Act enacted during Trump's first administration, while also paving the way for his campaign promises to eliminate taxes on tips and overtime pay.
However, the practical mechanics of these tax deductions are complex, raising questions for both employers and employees. For example, not all jobs are covered under the new tip provisions, the maximum annual deduction related to tips is $25,000, and the provision is only in effect for four years, from 2025 through 2028.
Overtime pay reporting may also bring significant changes for businesses. Klein said that before the qualified overtime pay deduction took effect this year, companies were not required to separately report overtime pay on employees' W-2 forms. These requirements affect employers who pay overtime to employees under the Fair Labor Standards Act, but questions remain about whether the reporting requirements apply in other situations.
"It is unclear whether the qualified overtime pay deduction is limited to employees who receive overtime pay under the FLSA. For example, employees may receive overtime pay under other systems such as collective bargaining agreements or the Railway Labor Act. We recommend that employers carefully document the rates and systems applicable to each employee's hours worked," Klein said in an email Tuesday.
Amid this uncertainty, the IRS has stated it will not impose penalties on employers who make "good faith efforts" to report qualified tips and overtime pay for the 2025 tax year, but the AICPA is pushing for safe harbor protections during the transition period so employers have clear reliance when Forms W-2 and 1099 are revised to accommodate the required additional tip and overtime information.
"Our letter advocates for critical safe harbor rules that employers can rely on when they may not be able to separately report qualified tips or qualified overtime compensation in a timely manner for the 2025 tax year," Klein said.