OBBBA Readiness: Payroll & Compliance Preparation for 2026

Purpose

As we enter 2026, employers need to prepare for the implementation of provisions under the One Big Beautiful Bill Act (OBBBA), which extends and modifies key tax elements of the 2017 Tax Cuts and Jobs Act (TCJA) and introduces new rules impacting how certain earnings — particularly tips and overtime — are treated for federal tax purposes.

This document outlines:

• What OBBBA requires from employers
• Why payroll readiness must be undertaken now
• What decisions leadership teams need to make
• How Alotten will support implementation based on scope

What OBBBA Means for Employers

OBBBA extends and modifies provisions of prior federal tax law and introduces distinct tax treatment for certain categories of earnings.

Once effective:

• Employers are required to accurately identify and report earnings that may receive different tax treatment
• Payroll systems must be able to distinguish qualified earnings from regular wages
• Withholding and reporting must align with IRS rules and guidance

This is a compliance and systems-readiness requirement, not a discretionary program or benefit decision.

Employer obligations exist regardless of whether an individual employee ultimately qualifies for or claims a deduction. The company’s responsibility is to accurately identify and report earnings in accordance with federal law; individual eligibility and benefit realization are determined at the employee tax-filing level.

Why Employers Must Act Now

Payroll systems cannot be retrofitted overnight. With OBBBA requirements now in effect, organizations must ensure their payroll infrastructure is fully operational to:

• Maintain compliant earning codes
• Test reporting and downstream impacts (tax, benefits, W-2s)
• Train managers on accurate reporting
• Communicate clearly and consistently with employees

Delays or incomplete implementation increases the risk of:

• Incorrect withholding or reporting
• Payroll corrections and rework
• Employee confusion or mistrust
• Audit exposure

Timing & Reporting Considerations (2025-2028)

Implementation Window

OBBBA - related preparation and implementation should be viewed as a multi-year effort, extending through 2028, as payroll systems, IRS guidance, and reporting requirements evolve.

2025 Transitional Treatment and 2026 Reporting

For the 2025 tax year, the IRS treated separate reporting of qualified tips and qualified overtime as a transition item. Employers were not required to separately report these amounts on 2025 Forms W-2 and received penalty relief where reporting was not yet supported.

However, employers were still expected to ensure payroll systems could identify and distinguish qualifying earnings during 2025. That foundational work now supports compliance going forward.

Beginning in 2026, finalized IRS guidance requires separate identification and reporting of qualified tips and qualified overtime. Payroll systems must be fully configured, tested, and consistently applied to support accurate withholding, reporting, and audit defensibility.

What This Means Practically

Federal income tax withholding does not change at the payroll level as a result of OBBBA deductions. Any tax benefit related to qualified tips or qualified overtime is realized through the employee’s individual tax return, not through reduced withholding.

Payroll systems must now be fully capable of accurately identifying and distinguishing qualifying earnings. Readiness decisions made during the 2025 transition period directly affect:

• Data integrity
• 2026 reporting accuracy
• Employee expectations and communications
• Audit defensibility

While separate W-2 reporting was not required for 2025, the operational groundwork established then determines compliance success going forward.

Looking Ahead: 2026–2028

As OBBBA reporting requirements continue to evolve and expand:

• Accurate historical earnings classification now matters for validation, reconciliation, and audit support
• Consistency across tax years is critical to avoid rework, corrections, and employee confusion
• Employers without early configuration may face compressed timelines, increased manual effort, and elevated compliance risk
• Ongoing preparation and system discipline support sustainable compliance as requirements mature through 2028.

What Is Required vs. What Is Operationally Variable

Required (Non-Optional)

• Accurate classification of tips and overtime
• Payroll configurations that separate qualified and non-qualified earnings
• Correct withholding and reporting
• Consistent application across similarly situated employees
• Documentation supporting payroll treatment

Variable (Based on Guidance, Not Preference)

• Timing of configuration (early readiness vs. post-guidance activation)
• Scope of impacted populations, based on IRS definitions
• Sequencing of implementation across payroll cycles

These are execution decisions, not opt-outs.

Leadership Decisions to Expect

Managers and HR partners should not determine individual tax eligibility or provide tax advice. Questions regarding eligibility or individual tax impact should be directed to a tax advisor.

Leadership teams will need to align on:

• Readiness timeline and risk posture
• Internal governance and controls
• Manager accountability for time and earnings reporting
• Communication approach with employees

Recommended Preparation Plan (2026)

To support accurate compliance and minimize disruption, we recommend a phased readiness approach:

1. Assessment and Validation
   
   • Review existing payroll earning codes and wage classifications
   • Identify employee populations impacted by tips and/or overtime
   • Validate payroll system capabilities (e.g., Paylocity, Rippling, ADP) to support required earning identification and reporting
2. Configuration and Testing
   
   • Finalize earning codes aligned with OBBBA requirements and IRS guidance
   • Ensure payroll systems clearly distinguish qualified and non-qualified earnings
   • Test downstream impacts, including tax withholding, benefits calculations, and W-2 reporting
3. Governance & Training
   
   • Establish internal controls and approval processes
   • Provide managers with clear guidance on accurate time and earnings reporting
   • Ensure consistent application across teams and locations
4. Communication and Change Management
   
   • Set realistic, fact-based expectations with employees
   • Reinforce that tax treatment is governed by federal law and regulatory guidance — not employer discretion
   • Communicate changes proactively to avoid confusion or misinterpretation

Early preparation enables compliant implementation, reduces operational risk, and protects employee trust when changes take effect.

Alotten’s Role & Support Model

If Alotten Supports Your Payroll

We will:

• Design and implement compliant earning codes
• Partner directly with your payroll provider
• Test configurations and reporting
• Support manager enablement and employee communications

If Alotten Does Not Support Your Payroll

We will:

• Provide guidance on required configurations
• Advise on compliant earning code design
• Review proposed payroll approaches
• Support communications, manager training, and readiness planning

In all cases, our role is to ensure accurate, defensible, and well-communicated compliance.

Bottom Line

OBBBA readiness is not a political issue or a policy preference. It is a payroll and tax compliance requirement that requires advance preparation. Organizations that prepare early reduce risk, avoid disruption, and maintain employee trust.

Alotten Support

Would you like to learn more about how Alotten can help you with OBBBA preparation and broader strategic payroll planning, then please contact Haley Williamson - Head of Payroll - at haley.williamson@alotten.com.

DISCLAIMER: The information provided herein is for informational purposes only and should not be construed as tax advice. It is not a substitute for consultation with a professional tax, accounting, or legal advisor. Please consult your own qualified tax advisor or legal counsel regarding your specific circumstances and how the provisions of the One Big Beautiful Bill Act may apply to your situation before taking any action.