The New OBBBA W-2 Rules: 5 Payroll Changes Every $1M Business Must Make Before New Year's Day
If your business has more than $1 million in revenue, payroll is probably too important to leave to a last-minute software update. The One, Big, Beautiful Bill Act (OBBBA) created new employer reporting requirements for 2026 wages, and your payroll systems need to be ready before January 1, 2027.
The first affected Forms W-2 will be issued to employees and filed with the Social Security Administration in early 2027. By then, your team will need accurate records of qualified tips, qualified overtime, tipped occupations, and other payroll information.
The good news is that the changes are manageable when addressed early. Our team at SJ Accounting Services LLC recommends treating the rest of Q4 as a payroll-readiness period, not a waiting period.
Here are five important changes every $1M+ business should review now.
1. The W-2 wage reporting threshold increases to $2,000 in limited cases
Beginning with wages paid after December 31, 2025, OBBBA increases the wage reporting threshold from $600 to $2,000 when the employer did not withhold federal income tax, Social Security tax, or Medicare tax.
However, this change is narrower than many headlines suggest.
For most regular employees, you should continue to assume that a Form W-2 is required when:
You withheld federal income tax, Social Security tax, or Medicare tax, regardless of the amount paid.
The employee received $2,000 or more in wages, even if no federal taxes were withheld.
You would have been required to withhold federal income tax if the employee had claimed no more than one withholding allowance or had not claimed exemption.
In other words, this is not a broad “small payment” exemption. Businesses should not stop issuing W-2s simply because an employee earned less than $2,000.
The threshold is most relevant to narrow situations involving small payments with no federal withholding. The IRS 2026 General Instructions for Forms W-2 and W-3 explain the exceptions in detail.
What to do before year-end: Have your payroll and tax teams review small-dollar wage payments, election workers, special employee classifications, and any payments where no federal taxes were withheld.
2. Qualified tips must be separately reported using Box 12, Code TP
OBBBA created a federal deduction for certain qualified tips. Beginning with 2026 wages, employers must separately report the total amount of cash tips reported by an employee.
The new reporting code is:
Box 12, Code TP: Total amount of cash tips reported to the employer.
Qualified tips generally include voluntary cash or charged tips and tips received through tip-sharing arrangements. Mandatory service charges are not automatically treated as qualified tips.
Tips remain subject to applicable federal income tax withholding, Social Security tax, and Medicare tax. The new reporting does not mean that tips disappear from payroll taxation. Instead, the reported amount gives employees information they may use when calculating their personal tax deduction.
Businesses with tipped employees should confirm that their systems can:
Capture tips reported through point-of-sale systems.
Reconcile cash, charged, and shared tips.
Separate tips from mandatory service charges.
Track employee-reported tips by pay period and calendar year.
Transfer the annual total into Box 12, Code TP.
Preserve supporting records in case the amount needs to be explained or corrected.
This is especially important for restaurants, hospitality companies, transportation businesses, personal service providers, and other organizations with tipped employees. A payroll system that merely carries forward the current year’s Box 7 information may not be enough for the new reporting requirements.
3. Qualified overtime must be separated from regular overtime pay
The third major change involves qualified overtime compensation.
For purposes of the new deduction, qualified overtime generally means the portion of overtime compensation paid above the employee’s regular rate under the Fair Labor Standards Act. For a typical time-and-a-half payment, this is generally the additional half-time premium, not the employee’s entire overtime wage.
Beginning with 2026 wages, employers must report the total amount of qualified overtime compensation using:
Box 12, Code TT: Total amount of qualified overtime compensation.
For example, if an employee’s regular rate is $20 per hour, the typical FLSA overtime rate is $30 per hour. The qualified overtime portion may generally be the additional $10 premium, not the full $30 paid for each overtime hour.
That calculation can become complicated when employees receive:
Nondiscretionary bonuses.
Shift differentials.
Multiple pay rates.
Double-time or holiday pay.
Different overtime rules under federal or state law.
Commissions or other compensation included in the regular rate.
Your payroll system should be able to identify the FLSA-required premium separately from regular wages and other overtime payments. If it cannot, your payroll provider may need to update the configuration or create a separate year-end calculation process.
The IRS overtime FAQs provide additional background, but your business still needs a practical process for collecting and validating the underlying payroll data.
4. Box 14 is changing, including new tipped occupation codes
The 2026 Form W-2 splits the former Box 14 into two sections:
Box 14a: Other information, such as certain state disability taxes, union dues, or other optional details.
Box 14b: Treasury Tipped Occupation Code(s).
For employees receiving reported cash tips, employers must enter the applicable Treasury Tipped Occupation Code(s) in Box 14b. Employers may report up to two codes.
If an employee received tips in a nonqualifying occupation, the instructions require the use of code 000 as one of the occupation codes. The IRS maintains the applicable list through its Tipped Occupations resource.
This means employers need more than a dollar amount. They also need accurate information about the role in which the tips were received.
Before January 1, your HR and payroll teams should review:
Job titles and job descriptions for tipped employees.
Whether employees work in more than one tipped occupation.
Whether occupation codes are stored in the payroll system.
Whether changes in an employee’s role are communicated to payroll.
Whether the system can populate Box 14b correctly.
The 2026 Form W-2 also adds Box 12, Code TA, for certain employer contributions to Trump Accounts. This may not apply to every business, but employers offering this benefit should confirm that their payroll system can report it properly.
5. Deadlines remain tight, and penalty exposure increases
The deadline for 2026 Forms W-2 is February 1, 2027. January 31, 2027, falls on a Sunday, so the deadline moves to the next business day.
By February 1, employers generally must:
Furnish Forms W-2 to employees.
File Forms W-2 and Form W-3 with the SSA.
Complete any required state or local filings.
Reconcile W-2 totals to Forms 941 and other employment tax filings.
The IRS also explains that employers must generally e-file Forms W-2 when they are required to file at least 10 information returns, counting Forms W-2 together with certain other information returns.
Penalty exposure is another reason to avoid waiting. For filings due after December 31, 2026, the IRS instructions list penalties of:
$60 per form when corrected within 30 days.
$130 per form when corrected more than 30 days late but by August 1.
$340 per form when filed after August 1, not corrected, or not filed.
At least $690 per form with no maximum in cases of intentional disregard.
The 2025 transition relief for separately reporting tips and overtime does not provide a comfortable blanket for 2026 reporting. Your business should expect the new information to be accurate and complete.
Your Q4 payroll preparation checklist
Before New Year’s Day, we recommend completing these steps:
Ask your payroll provider when its OBBBA updates will be available.
Confirm that the system can track qualified tips and qualified overtime separately.
Review tipped employee job classifications and Treasury occupation codes.
Test the new Box 12 codes TP, TT, and, if applicable, TA.
Verify that Box 14a and Box 14b are mapped correctly.
Reconcile payroll records to Forms 941 throughout Q4.
Collect updated employee addresses and Social Security information.
Build an internal deadline earlier than February 1, 2027.
Run a test W-2 process before the final payroll of the year.
Document who reviews, approves, and files the final forms.
For a $1M+ business, payroll errors can affect employees, tax filings, financial statements, and management time. A strong process is not just about avoiding penalties. It also helps ensure employees receive accurate information for their personal tax returns.
Let SJ Accounting Services help you prepare
OBBBA payroll compliance is exactly the kind of issue that can appear simple until the details begin multiplying. Our team can help you review payroll processes, coordinate with your payroll provider, analyze tax reporting requirements, and prepare your business for year-end compliance.
We provide tax planning services, bookkeeping, outsourced controller support, Virtual CFO services, and other accounting-related consulting for growing businesses and high-net-worth individuals.
If your company has not yet reviewed the 2026 W-2 changes, please schedule a consultation before Q4 calendars fill. Businesses that act early will have more time to test systems, correct data, and avoid a stressful January.
Thank you for trusting SJ Accounting Services LLC as your accounting partner. We look forward to helping your business enter the new year with confidence.
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