The U.S. Treasury Department and the Internal Revenue Service (IRS) issued guidance on Friday that temporarily allows more workers to benefit from the tax advantages of the "no tax on tips" and "no tax on overtime pay" provisions in President Trump's "One Big Beautiful Bill."

Under the 2025 Budget Reconciliation Act, workers can generally deduct up to $25,000 in tips and $12,500 in overtime pay from their income. The Act provides an exemption from the deduction for workers in certain "qualified trades or businesses" that are classified as "specified service trades or businesses" (such as healthcare, law, and the performing arts).

However, according to Notice 2025-69, the Treasury Department and the IRS believe that "additional guidance is needed to assist employees and employers in determining whether an employer's trade or business is a specified service trade or business."

The guidance provides "transitional relief" for employees and employers until January 1 of the first calendar year following the issuance of final regulations, to determine whether they qualify for the exemption category. The guidance acknowledges that "many of these employers are small businesses that have never before been required to make such a determination."

The guidance also relieves employers from penalties for failing to provide employees with correct information regarding qualified tips and qualified overtime compensation for the 2025 tax year.

The IRS has not yet updated tax forms—including Form W-2, Form 1099-NEC, and Form 1099-MISC—and "encourages employers to provide tipped employees with separate accounts of occupation codes and cash tips to help them correctly claim the qualified tip deduction for the 2025 tax year," attorneys at Ogletree Deakins wrote in an analysis on Friday. The guidance also instructs employees on how to determine their potential deduction.

Despite the relaxed provisions of the law, employers should still prepare for its implementation, shareholders at Littler wrote on Friday.

"Although the IRS does not require strict adherence to the Act's reporting requirements for the 2025 tax year, employers should still make every effort to provide employees with a statement showing: (a) the total reported cash tips; (b) the qualified tip occupation; and (c) the amount of qualified overtime compensation paid," the shareholders stated. "After all, employees expect to receive this information from their employers in order to take advantage of these deductions. Additionally, employers need to be prepared to accurately calculate the amount of qualified overtime compensation paid for the 2026 tax year, when the penalty relief will no longer apply."