Major changes are coming to payroll tax reporting, and now's the time to get ready. The One Big Beautiful Bill Act (OBBBA) has introduced significant updates to information return and payroll tax reporting requirements that will reshape how businesses handle their reporting obligations.
While some changes don't take effect until 2026, smart business owners are already preparing. Here's what you need to know about the new rules and how they'll impact your payroll processes.
One of the most significant changes involves reporting thresholds for various types of payments. Currently, businesses must report payments of $600 or more for rents, salaries, wages, premiums, compensation, and other income on forms like W-2s, 1099-MISC, and 1099-NEC.
Starting in 2026, that threshold jumps to $2,000—more than a three-fold increase. For payments made after 2026, the threshold will include inflation adjustments, meaning it will continue to rise over time.
This change will reduce the administrative burden for many businesses, as fewer payments will meet the reporting requirement. However, it's crucial to understand that this only affects information returns, not payroll tax obligations themselves.
The OBBBA establishes new federal income tax deductions for employees who receive qualified tip income and qualified overtime income from 2025 through 2028. While these are welcome tax breaks for workers, they create new tracking and reporting requirements for employers.
Here's the catch: even though these amounts are deductible for federal income tax purposes, they're still subject to federal payroll taxes and income tax withholding. They may also remain fully taxable for state and local purposes.
The real challenge? Employers need to track and report these qualified amounts so employees can claim their deductions. This means implementing new systems to identify, categorize, and report tip and overtime income separately.
The IRS has provided some relief for the immediate future. For 2025, there will be no changes to existing federal information returns, payroll tax returns, or withholding tables. Forms W-2, 1099s, and Form 941 will remain unchanged this year.
However, this doesn't mean you can wait. Employers should start tracking qualified tip and overtime income immediately and implement procedures to retroactively track these amounts back to January 1, 2025. The IRS has promised transition relief for 2025, but the specifics are still being developed.
The IRS has released proposed regulations that define which occupations are eligible for the qualified tip income deduction. These fall into eight main categories:
Each eligible occupation has been assigned a three-digit code for reporting purposes, which will be crucial for proper classification on information returns.
The IRS has already released a draft of the 2026 Form W-2, giving us a glimpse of what's coming. The updated form includes several new reporting codes in Box 12:
Additionally, a new Box 14b will allow employers to report the occupation of employees who receive qualified tip income, using the three-digit codes mentioned earlier.
Even though major changes don't kick in until 2026, preparation should start immediately. Begin tracking qualified tip and overtime income for all eligible employees, and consider upgrading your payroll systems to handle the new categorization requirements.
Review your current reporting processes and identify what modifications you'll need to make. If you work with a payroll service provider, discuss these upcoming changes and ensure they're prepared to handle the new requirements.
Most importantly, stay informed. The IRS continues to issue guidance and regulations as implementation approaches, and missing key updates could create compliance headaches down the road.
These payroll tax reporting changes represent a significant shift in how businesses handle employee compensation reporting. While the increased thresholds will simplify some processes, the new tracking requirements for tips and overtime create fresh challenges that require careful planning.
The key to successful implementation is starting early and staying informed. By beginning your preparation now, you'll be ready when these changes take full effect in 2026—and you'll help ensure your employees can take advantage of their new tax benefits.