OBBBA in 2026: Immediate Action Required for Employers

Takeaways

• The IRS ended 2025 transition relief so payroll systems, reporting workflows and workforce policies should be fully operational in 2026 for information returns, benefit plan operation, immigration compliance pressure, and workforce policy impacts.
• Immigration and benefits compliance costs rise in 2026, driven by new OBBBA mandated immigration fees, heightened worksite enforcement expectations and benefit plan updates.
• OBBBA provisions continue phasing in through 2028; employers should engage counsel and vendors proactively to manage compliance risk and minimize disruption.

Related links

• OBBBA’s Tips & Overtime Tax Break: Reclassification Considerations, Reporting Requirements, Industry Impact + More
• IRS Guidance on Claiming the New Tax Deduction for Tips and Overtime Pay
• IRS 2025 Penalty Relief — A Break for Employers Under OBBBA’s Tax Reporting Rules
• New Tax-Advantaged Savings Accounts for Children: Trump Accounts Expected to Go Live in 2026
• Federal OBBBA Roundup: What Employers Need to Know Now

Article

H.R. 1 became law as Public Law 119-21, the “One Big Beautiful Bill Act” or “OBBBA,” on July 4, 2025. Although several of the most significant employer-facing provisions affected operations in 2025, the focus shifts to full operational compliance in 2026, particularly in payroll reporting, benefit plan administration, and immigration compliance readiness.

We recap key employer obligations and planning considerations for 2026, highlighting where temporary transition relief applied in 2025 but should not be mistaken for long-term flexibility.

Payroll Modernization and Reporting: 2026 Is the Operational Inflection Point

The OBBBA created new federal income tax deductions for qualified tips and qualified overtime compensation for individuals, applicable for tax years 2025 through 2028. Although these deductions are claimed by employees, employers play a central role in capturing, classifying, and reporting the compensation data that supports them.

Tax Cuts on Tips and Overtime

Overtime. The OBBBA allows a limited deduction for overtime pay earned for hours worked beyond 40 in a workweek. Only the portion paid in excess of the employee’s regular rate qualifies, and the annual deduction is capped at $12,500 ($25,000 for married employees filing jointly). Overtime required by the Fair Labor Standards Act (FLSA) is eligible; state-law daily overtime or contractual pay generally do not qualify.

Tips. The OBBBA also permits tipped workers to deduct up to $25,000 of qualified tips. To qualify, tips must be voluntary and not subject to negotiation. Mandatory service charges do not qualify; tips received through tip-sharing arrangements do. The deduction applies only to workers in occupations that customarily and regularly received tips as of Dec. 31, 2024, as identified in IRS proposed regulations that may be relied upon pending final rules.

For a more detailed discussion of eligibility, reclassification considerations, and industry-specific impacts, see OBBBA’s Tips & Overtime Tax Break: Reclassification Considerations, Reporting Requirements, Industry Impact + More.

Employer Reporting Obligations and the End of Transition Relief

Beginning with the 2026 tax year, employers will be required to separately report qualified tips and qualified overtime compensation on Form W-2. Although the IRS provided penalty relief for 2025 and did not require revised forms for that year, this transition period ends in 2026.

Employers should be prepared to update payroll, timekeeping, and HR systems to accurately track and report:

• FLSA-required overtime pay (distinct from other pay); and
• Qualified tips and occupation codes for tipped employees.

Failure to implement compliant reporting processes for 2026 may result in penalties once transition relief expires.

For additional IRS guidance on claiming and reporting the new deductions, see:

• IRS Guidance on Claiming the New Tax Deduction for Tips and Overtime Pay
• IRS 2025 Penalty Relief — A Break for Employers Under OBBBA’s Tax Reporting Rules

State Tax Treatment

In 2025, more than 20 states introduced legislation addressing the state tax treatment of tips or overtime. Some states that automatically conform to federal tax law have adopted the OBBBA deductions, while others have chosen to decouple and require add-backs. Employers should monitor state developments that may affect payroll administration and employee communications.

Immigration Compliance: Budgeting and Readiness in a Heightened Enforcement Climate

OBBBA includes immigration-related provisions with direct cost and compliance implications for employers. The law establishes new and increased immigration-related fees, some of which are mandatory or non-waivable. Employers should anticipate higher per-case immigration costs and reflect them in 2026 budgets.

OBBBA also supports a broader policy environment of increased worksite enforcement. Although there is no single effective date tied to enforcement changes, employers should expect continued scrutiny of Form I-9 completion, reverification, and document retention practices.

As part of 2026 planning, employers should evaluate whether their immigration compliance programs are standardized, auditable, and supported by clear internal response protocols.

Benefits Plan Changes Taking Effect for 2026

Several OBBBA provisions affecting employee benefits take full effect for plan years or taxable years beginning after Dec. 31, 2025.

• Telehealth and HDHPs. The OBBBA permanently extends the telehealth safe harbor for high-deductible health plans, allowing pre-deductible telehealth coverage without disqualifying health savings account eligibility.
   
• Dependent care assistance. Beginning in 2026, the maximum annual exclusion increases to $7,500 ($3,750 for married individuals filing separately). Adoption of the new amount is optional but may require plan amendments and payroll updates.
   
• Employer-provided childcare credit. The expanded credit may influence employer decisions regarding childcare benefits or partnerships.

Trump Accounts Beginning in 2026

Starting in 2026, the OBBBA creates “Trump Accounts,” an IRA-type for eligible children. Accounts may be established by an authorized person (typically, a parent or guardian) through a Form 4547 election, with contributions permitted beginning July 4, 2026.

Although the statute does not impose mandatory employer obligations, it does allow limited employer contributions on a tax-favored basis.

For a more detailed discussion of “Trump Accounts,” see New Tax-Advantaged Savings Accounts for Children: Trump Accounts Expected to Go Live in 2026.

Mandatory Roth Catch-Up Contributions

The IRS confirmed that the SECURE 2.0 Act’s mandatory Roth catch-up contribution rule applies for plan years beginning in 2026. Participants with prior-year FICA wages above indexed thresholds must have catch-up contributions designated as Roth.

Plan sponsors should coordinate with payroll vendors, recordkeepers, and ERISA counsel to ensure proper implementation and participant communications.

Tax and Public Policy Changes Affecting the Workforce

Although they do not impose direct employer compliance obligations, several OBBBA provisions may generate employee questions in 2026, including changes to the SALT deduction cap and new Medicaid and SNAP work requirements. Employers should prepare neutral, informational responses and avoid collecting unnecessary personal data.

Looking Ahead

For many employers, systems and processes must operate as designed in 2026. Employers that delay preparation risk payroll errors, reporting corrections, wage-hour exposure, and increased compliance costs.

As OBBBA provisions continue to phase in through 2028, employers should continue monitoring guidance, engaging vendors early, and revisiting compliance frameworks to ensure readiness.

For a broader overview of OBBBA’s employer impact, see Federal OBBBA Roundup: What Employers Need to Know Now. Please contact a Jackson Lewis attorney with any questions.