The implementation of the One Big Beautiful Bill Act (OBBBA) is set to significantly impact employers starting in 2026, following the cessation of transition relief from the Internal Revenue Service (IRS) at the end of 2025. This legislation mandates that payroll systems, reporting workflows, and workforce policies be fully operational to meet new compliance requirements. This shift will affect various aspects, including information returns, benefits plan operations, and immigration compliance.
As of January 1, 2026, employers will face increased costs associated with compliance due to new immigration fees and heightened worksite enforcement expectations. These changes come as the OBBBA provisions continue to phase in through 2028, which adds urgency for employers to engage legal counsel and vendors proactively. By doing so, they can mitigate compliance risks and minimize potential disruptions to their operations.
Key Changes in Payroll and Reporting Requirements
A central aspect of the OBBBA is the introduction of new federal tax deductions for qualified tips and overtime compensation applicable for tax years 2025 through 2028. Although these deductions are intended for employees, employers play a critical role in capturing, classifying, and reporting the necessary compensation data.
For overtime pay, the OBBBA allows a limited deduction for hours worked beyond 40 in a week, with a cap of $12,500 per year, or $25,000 for married employees filing jointly. Only the portion that exceeds the employee’s regular rate qualifies, and this does not include state-law daily overtime or contractual pay. Similarly, tipped workers can deduct up to $25,000 of qualified tips, provided these tips are voluntary and not subject to negotiation.
Beginning with the 2026 tax year, employers will be required to report qualified tips and overtime compensation separately on Form W-2. The IRS had previously granted penalty relief for 2025, allowing for simplified reporting, but this will no longer apply. Employers must ensure that their payroll, timekeeping, and HR systems are updated to accurately track and report both types of compensation. Failing to implement compliant reporting processes could result in penalties once the transition relief expires.
Immigration Compliance and Benefit Plan Updates
The OBBBA also includes provisions that impose new immigration-related fees and increase compliance costs for employers. Organizations should prepare for higher immigration costs and account for these in their budgets for 2026. The law fosters an environment of increased worksite enforcement, meaning employers should expect greater scrutiny regarding Form I-9 completion, reverification, and document retention practices.
In terms of employee benefits, several provisions will take full effect for plan years beginning after December 31, 2025. For instance, the maximum annual exclusion for dependent care assistance will increase to $7,500, with an option for employers to adopt this new amount, potentially requiring amendments to existing plans.
Additionally, the OBBBA introduces “Trump Accounts,” a new type of savings account for eligible children, set to be available starting July 4, 2026. While the law does not impose mandatory obligations on employers, it permits limited employer contributions on a tax-advantaged basis.
Employers must also comply with the mandatory Roth catch-up contribution rule starting in 2026, as outlined by the SECURE 2.0 Act. Participants earning above established thresholds must have their catch-up contributions designated as Roth. Plan sponsors should work closely with payroll vendors and ERISA counsel to ensure proper implementation and communication with participants.
As the OBBBA provisions continue to unfold, employers are advised to monitor state developments that may affect payroll administration and employee communication. With many changes coming into effect, effective planning and preparation are essential for compliance.
Employers that delay addressing these requirements risk payroll errors, compliance costs, and potential penalties. Engaging with legal and compliance experts early will help ensure that organizations are prepared for the challenges that the OBBBA will bring in 2026 and beyond.
