OBBBA and SECURE 2.0: Year-end 2026 payroll changes for the middle market

The year 2026 is a turning point for middle market payroll compliance. The One Big Beautiful Bill Act (OBBBA) has introduced sweeping changes to how middle market organizations report wages, tips and overtime, while the IRS has sharpened scrutiny of information returns and payee statements. For employers, this means proving those rules are correctly built into every payroll system, pay cycle and Form W-2 (Wage and Tax Statement).

Compliance is a shared responsibility, but vendor functionality does not replace employer-specific validation. A payroll provider can deliver a solution for Fair Labor Standards Act (FLSA)-qualified overtime or the mandatory Roth catch-up tied to Federal Insurance Contributions Act (FICA) wage thresholds, but accuracy still depends on configuration. The same holds true for Savings Incentive Match Plan for Employees (SIMPLE) plans: SIMPLE 401(k)s and SIMPLE IRAs (individual retirement accounts) carry distinct limits and rules, and relying on a vendor to account for them can be costly. Human resources, payroll, tax and finance each play a role in the validation process.  

The time to prepare is now: Review payroll calendars, initiatives, organizational changes and system configurations early, and validate the full process end to end. Ongoing testing can help identify gaps sooner and reduce costly year-end corrections.

OBBBA reporting requirements

Middle market organizations are facing a more complex reporting environment, with new tax and benefits requirements and increased regulatory scrutiny. For 2026 and beyond, employers should consider the following:

Information reporting thresholds

• The reporting threshold for Forms 1099-NEC (Nonemployee Compensation), 1099-MISC (Miscellaneous Information) and W-2 generally increases to $2,000 for 2026, up from $600. The threshold will be indexed for inflation in future years.

Qualified tips

• The OBBBA provides an income tax deduction of up to $25,000 for qualified tips.
• Qualified tips must generally be voluntary cash or credit card tips determined by the customer. Mandatory service charges do not qualify.
• The employee must work in an occupation that customarily and regularly received tips on or before Dec. 31, 2024.
• Tips remain subject to applicable federal, state, and local income and employment taxes.
• Beginning in 2026, employers must report total tips in Box 12 of Form W-2 using code TP and the applicable occupation code in Box 14B. Tips received by nonemployees must be reported on Forms 1099-NEC and 1099-MISC, as applicable.

Qualified overtime

• The OBBBA provides a deduction for the qualified overtime premium under the FLSA, limited to $12,500 for single filers and $25,000 for married couples filing jointly.
• The deduction applies only to the FLSA premium portion; overtime required under state or contract requirements does not qualify.
• Qualified overtime remains subject to applicable income and employment taxes.
• Beginning in 2026, the qualified overtime premium must be reported in Box 12 of Form W-2 using code TT. Applicable amounts for nonemployees must also be reported on Forms 1099-NEC and 1099-MISC.

Trump Accounts

• Beginning July 4, 2026, employers may contribute to Trump Accounts for employees or their dependents.
• Employer contributions are generally limited to $2,500 annually and must be reported in Box 12 of Form W-2 using code TA beginning in 2026.

Additional W-2 changes

• Box 14 on Form W-2 is now divided into two sections, with occupation codes related to tips reported in Box 14B.
• Box 12 is limited to four codes per W-2. Employees with more than four applicable codes may need additional W-2 forms.

Risks of noncompliance and late preparation

Late, incomplete or incorrect information returns and payee statements can result in penalties. For 2026:

• Up to 30 days late: $60 per return or statement, up to $698,500 in the aggregate
• 31 days late through Aug. 1, 2027: $130 per return or statement, with a maximum of $2,049,000 in the aggregate
• After Aug. 1, 2027, or not filed: $340 per return or statement, with a maximum of $4,098,500 in the aggregate
• Intentional disregard: $680 per return or statement, with no maximum aggregate penalty

In addition, willfully fraudulent W-2 forms may result in civil damages of $5,000 or more and potential criminal penalties.

2025 transition relief

The IRS provided limited penalty relief for tax year 2025 as employers adapted to new OBBBA reporting requirements.

The relief applied when otherwise complete and correct returns and statements were filed and furnished. It covered the failure to separately report:

• Cash tips and applicable occupation information
• Qualified overtime compensation

The relief did not cover failures to file or furnish returns or statements or incorrect aggregate amounts. In addition, going forward, it does not apply to 2026.

Preparing for 2026

Employers should validate payroll and reporting processes by:

• Creating separate fields for cash tips and occupation codes
• Tracking FLSA-qualified overtime premiums separately from regular wages
• Tracking qualifying Trump Account contributions separately
• Keeping these amounts separate from ordinary taxable wages throughout payroll processing

Understanding vendor and employer roles

Regulatory changes are converging across tax, payroll and benefits, creating additional areas of risk, particularly for middle market organizations that rely heavily on vendor systems.

A common misconception is that vendors are fully responsible for compliance and accurate programming. However, in practice, vendors provide tools that support payroll processing and compliance but may not account for employer-specific rules, policies or requirements.

Employers are ultimately responsible for validating their data and system configuration accuracy, though the scope of that responsibility varies by employer. This validation should happen end to end, with employers working with vendors to review tax filings and mock W-2s where available, since small configuration gaps can create broader compliance issues and affect employees.

Common reporting gaps include:

• Deduction and earning codes: Codes may not reflect current tax law and may be reused without review.
• W-2 mapping: New codes or reporting requirements may not be mapped correctly to W-2 forms.
• Overtime calculations: OBBBA requirements may conflict with timekeeping and payroll system configurations, resulting in calculation errors.
• SECURE 2.0 provisions: Automatic changes may not account for optional provisions established with a 401(k) provider.
• Contribution limits: Year-end contribution limits and catch-up contributions should be reviewed before employees reach those limits.
• Employer contributions: Inadequate mapping of employer health savings account contributions can result in incorrect W-2 reporting and amended forms.

SECURE 2.0 and 401(k) payroll considerations

SECURE 2.0 changes affect payroll setup and how employee contributions flow to plan recordkeepers. Therefore, employers should review:

Employee contributions

• Pretax deferrals: Subject to the 2026 $24,500 annual limit and payroll taxes
• Roth deferrals: Subject to income and payroll tax withholding. Confirm that Roth contributions are permitted under the plan document.
• After-tax contributions: Subject to income and payroll tax withholding, with different tax treatment at distribution

Catch-up contributions

• Catch-up contributions apply to employees age 50 or older when an applicable IRS or plan limit is exceeded.
• The enhanced catch-up applies to employees ages 60 to 63. Confirm which catch-up provisions the plan allows.

Mandatory Roth catch-up

• Beginning in 2026, catch-up contributions for certain high earners must be treated as Roth contributions.
• For 2026, the rule generally applies to employees whose 2025 FICA wages exceeded $150,000. The determination of a high earner for purposes of mandatory Roth catch-up contributions differs from the determination of a highly compensated employee for other plan purposes.

Automatic enrollment

• Automatic enrollment is generally required for new 401(k) and 403(b) plans established after Dec. 29, 2022.
• Employers should confirm eligibility, deferral rates, contribution types and opt-out processes.
• Common errors include missed enrollment, incorrect escalation and missed opt-outs.

Long-term, part-time employees

• Eligible employees must be provided the option to contribute salary deferrals to a 401(k) or 403(b) plan.
• The rule generally applies after two consecutive 12-month periods with at least 500 hours of service in each year.

SIMPLE plans

• SIMPLE 401(k) and SIMPLE IRA plans have different deferral limits.
• The mandatory Roth catch-up rule does not apply to SIMPLE IRAs.
• SIMPLE plans are exempt from the SECURE 2.0 automatic enrollment requirement.

Configure and test payroll systems early

Accurate reporting starts with proper configuration, data mapping and a clear understanding of dependencies across tax, payroll, timekeeping and benefits. Misalignment can lead to reporting errors.

Do not wait until December: By year-end, employers may be correcting issues rather than preventing them. Review and test configurations throughout the year for a smoother year-end process.

A common misconception is that a vendor’s solution automatically ensures compliance. In reality, vendor functionality is only as accurate as the configuration and data behind it.

For example, employers should evaluate how their vendor’s OBBBA overtime reporting solution applies to their specific payroll practices:

• Earning codes: Confirm codes are classified correctly and align with vendor requirements.
• Employee eligibility: Validate eligibility rules and how they flow through payroll.
• Timekeeping data: Verify data flows correctly into payroll and aligns with the vendor’s calculation logic.
• Pay frequency: Confirm monthly and semimonthly pay periods align with the FLSA workweek, since misalignment can affect overtime calculations.
• Overtime practices: Review state rules, double time, union agreements and employer-specific pay policies.
• W-2 reporting: Confirm the solution produces accurate, complete year-end reporting.

The key principle is simple: The vendor provides the tool, but the employer is responsible for its configuration and the resulting compliance outcomes.

In addition, configuration issues can build quietly throughout the year and surface only at year-end. Therefore, employers should maintain ongoing oversight of the following critical areas:

• System configuration: Earnings, deductions and tax setup are often set once and rarely revisited, affecting how payroll transactions are processed throughout the year.
• Data alignment: Employee records—including addresses, work locations, tax jurisdictions, status changes and terminations—must remain accurate, supporting reliable downstream reporting.
• System design: Data flows across HR, timekeeping, benefits, payroll and general ledger systems, creating opportunities for misalignment at each handoff.