The 2026 PayrollOrg Capital Summit opened with a sober message for payroll professionals: despite sweeping tax legislation and popular political slogans, the practical realities of payroll compliance remain complex and highly technical.
In the event’s first session, “Critical Issues for Payroll,” Daniel Lewis, Esq., Vice President of Compliance Programs and Government Affairs at ADP, LLC, and president of the National Payroll Reporting Consortium (NPRC), delivered a wide-ranging overview of federal policy developments affecting payroll with a particular focus on implementation challenges arising from the One Big Beautiful Bill Act (OBBBA) and its “so-called” no tax on tips and overtime.
Lewis framed the discussion around a recurring challenge for payroll departments—bridging the gap between public expectations and statutory reality. “I say ‘so‑called’ because tips and overtime still are taxed, but there are limited deductions that are available,” he said. “Workers who think that they’re not paying any more taxes on tips and overtime are going to be probably a little bit surprised when they go to submit their returns.”
OBBBA: The 2026 Shift from Transition to Compliance
Lewis noted that while OBBBA was enacted through reconciliation to advance several of President Trump’s priorities, payroll’s most significant challenges lie ahead. “It’s a comprehensive tax and economic package,” he said, adding that it introduces new rules affecting “withholding, reporting, and employee communications.”
For payroll professionals, the key distinction is timing. While the law is retroactive to January 1, 2025, Lewis emphasized that 2025 operates largely as a transition year, with limited employer reporting obligations. That changes in 2026.
“What is certain is that companies will be required to include the amount of qualified overtime and cash tips on an individual’s Form W‑2 and 1099 going forward,” Lewis said. Employers and payroll providers must be prepared to support those calculations using statutory definitions, not existing pay practices.
Qualified Tips: Eligibility, Caps, and System Implications
Lewis explained that the qualified tip deduction applies only to workers in occupations that “customarily and regularly receive tips” as of December 31, 2024, using Treasury‑issued tipped occupation codes, or “T‑TOCs.” “The idea behind it was to make sure that the right occupations are getting these credits,” he said.
Even for eligible workers, the deduction applies only to cash tips, a category that includes credit cards, debit cards, mobile payment apps, and tip pools—but excludes cryptocurrency and stablecoins. Mandatory service charges also do not qualify. “The deduction only applies to tips that are provided voluntarily,” Lewis said.
The deduction is capped at $25,000, subject to income phaseouts, and remains fully subject to Social Security and Medicare taxes for both employees and employers—an important point Lewis said many workers may not understand.
Overtime Deduction Hinges on FLSA Standards
Lewis cautioned that the overtime deduction is similarly limited and often misunderstood. Only overtime required under the Fair Labor Standards Act qualifies, generally hours worked over 40 in a workweek.
“I learned over the last year that nobody pays overtime based on that,” Lewis said, noting that many employers pay overtime more generously due to state laws, collective bargaining agreements, or employer policy.
Only the premium portion of overtime pay qualifies for the deduction. “If you earn one and a half times your regular rate of pay, it’s that half that is eligible,” he said. “The regular rate does not qualify.”
As with tips, the overtime deduction is capped, income‑limited, and subject to FICA taxes—creating payroll calculation and communication challenges heading into 2026.
Employee Communication Becomes a Payroll Imperative
Lewis repeatedly stressed that payroll professionals will play a central role in managing employee expectations shaped by political messaging. “There still remains quite a bit of confusion between what you hear referenced in the press versus what the law actually provides for,” he said.
Without clear guidance, employees may overestimate deductions, adjust withholding incorrectly, or face unexpected tax liabilities. “There’s a risk of employees overestimating what their eligibility is going to be,” Lewis warned.
Additional Policy Developments on Payroll’s Radar
Beyond OBBBA, Lewis highlighted several additional developments payroll professionals should continue monitoring in 2026.
He pointed to bipartisan tax administration proposals that would expand IRS online account access and grant qualified reporting agents greater visibility into client accounts, as well as allow voluntary federal withholding for independent contractors.
Lewis also discussed executive actions aimed at modernizing federal payments and reducing reliance on paper checks, noting payroll industry support for electronic payment systems due to fraud and efficiency concerns.
Artificial intelligence, while not yet directly regulated from a payroll perspective, is drawing increasing federal and state attention. Lewis cautioned that divergent state AI laws—particularly around privacy and automated decision‑making—could create compliance challenges for payroll providers and employers.
He also flagged developments affecting workforce administration, including changes to independent contractor standards, higher H‑1B visa fees and revised lottery rules, and continued expansion of state pay transparency laws, particularly for multi‑state employers.
Payroll Takeaway: What to Focus on for 2026
- Shift from transition to compliance. 2025 offers limited relief; 2026 requires formal reporting of qualified tips and overtime.
- Use statutory definitions. Only FLSA overtime and qualifying cash tips are eligible for deductions.
- Expect employee confusion. Headlines may overstate benefits; proactive communication is critical.
- Prepare payroll systems now. Tracking FLSA‑based overtime and qualifying tips will be required.
- Monitor broader policy changes. Tax administration reform, AI regulation, and state pay transparency laws remain active watch areas.
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