Preparing for OBBBA Payroll & Reporting Changes | Meaden & Moore

The One Big Beautiful Bill Act (OBBBA) introduces several payroll and information
reporting updates that employers will need to understand and plan for before the start of 2026. While the intention behind these changes is to streamline reporting, the reality is that payroll teams may face new tracking and documentation responsibilities, particularly when it comes to tip and overtime income.

Higher Reporting Thresholds for 2026 Filing Season

Businesses must report certain payments on information returns such as Form 1099-MISC and Form 1099-NEC. Under current rules, the reporting threshold is triggered when payments of at least $600 are made during the calendar year.

Under the OBBBA:

• For payments made after 2025, the reporting threshold for Form 1099-MISC and Form 1099-NEC increases to $2,000.

• Beginning in 2027, this threshold will be indexed annually for inflation.

There is no change to Form W-2 reporting. Employers must continue to issue a Form W-2 for every employee who receives wages, regardless of the amount.

Deduction for Qualified Tip & Overtime Income (2025–2028)

Between 2025 and 2028, employees who receive qualified tip income from a qualified occupation or qualified overtime income may be eligible for a new federal income tax deduction. Both deductions are available for itemizing and non-iteming taxpayers. The maximum annual qualified tip income deduction is $25,000 whereas the maximum annual qualified overtime deduction is $12,500 ($25,000 for joint filers). The deductions phase out for taxpayers with modified adjusted gross income over $150,000 ($300,000 for joint filers).

These amounts are not excluded from income and remain subject to:

• Federal income tax withholding
• Social Security and Medicare (FICA) taxes
• State and local taxes, where applicable

For employers, the key challenge is tracking these amounts, so employees have accurate information when claiming the deduction.

Tracking Begins in 2025

Although the IRS confirmed that 2025 versions of Form W-2, Form 941, Forms 1099, and payroll withholding tables will not reflect these changes, employers should begin capturing tip and overtime data starting January 1, 2025.

The IRS has indicated that there will be transition relief for 2025 reporting, but employers should not wait — retroactive calculation would be burdensome.

Occupations Eligible for the Qualified Tip Income Deduction

The IRS has issued proposed regulations listing occupations where tip income is considered eligible for the deduction. The list groups occupations into categories and assigns each one a three-digit occupation code for reporting purposes.

These proposed rules are not final and could change before they are adopted.

Draft 2026 Form W-2 Reflects New Codes

The draft version of the 2026 Form W-2 includes new reporting elements tied to the OBBBA. Below are the proposed codes relating to qualified tip and overtime income.

Because these features are currently in draft form, final formatting and instructions may still change before the 2027 filing season.

What Employers Should Be Doing Now

• Update payroll systems to track qualified tips & overtime income beginning January 1, 2025.
• Work with payroll providers to confirm reporting capabilities and future form updates.
• Identify employees and job roles likely affected by the new tip income deduction.
• Begin preparing employee communications showing tips received and occupation of the tip recipient or total amount of qualified overtime compensation paid during 2025.

Reach out today to our Tax Advisors and Client Advisory Services teams to help you navigate the OBBBA transition with confidence and clarity.