The One Big Beautiful Bill Act didn’t change payroll overnight. In fact, for most of 2025, it felt like nothing happened at all.
That was by design.
The IRS intentionally treated 2025 as a transition year, keeping payroll mechanics unchanged while new federal income tax deductions quietly came into effect at the individual tax return level. Now, in 2026, the impact is finally showing up — not on paychecks, but in employee questions, documentation requests, and preparation for upcoming reporting changes.
Being prepared in 2026 isn’t about doing more work. It’s about doing the right work, grounded in what the IRS has actually said.
1. Anchor Everything in the Correct Framing: These Are Deductions, Not Payroll Changes
The single most important preparation step is conceptual.
According to IRS Notice 2025-69, the OBBBA created federal income tax deductions for qualified tips and qualified overtime compensation. These deductions are claimed by individual taxpayers on their federal returns — they are not payroll exclusions, and they do not eliminate federal withholding during payroll processing.
The IRS reinforced this in IR-2025-82, stating that withholding tables and information returns were not changed for tax year 2025.
Prepared employers use this language consistently. They avoid phrases like “tax-free tips” or “overtime isn’t taxed anymore,” which the IRS does not use and does not support.
2. Expect Employee Questions in 2026 — the IRS Designed It This Way
Employees are now filing their 2025 tax returns, which is when these deductions are first claimed.
The IRS explicitly acknowledged in Notice 2025-69 that:
- Separate accounting for qualified tips and overtime may not appear on 2025 W-2s
- Individuals may need to rely on documentation and “reasonable methods” to determine deductible amounts
This means employee questions in 2026 are not confusion — they are the natural result of a phased implementation.
Prepared employers anticipate questions and respond calmly with facts, rather than scrambling or over-explaining.
3. Make Sure 2025 Payroll Records Are Accessible, Not Just Accurate
The IRS guidance repeatedly emphasizes that individuals may rely on pay statements, earnings records, and other employer-maintained documentation to determine their deductions for 2025.
That makes accessibility critical.
Preparation in 2026 means asking practical questions:
- Can employees retrieve 2025 pay statements if requested?
- Are timekeeping and tip records retained in a usable format?
- Is there a clear internal process for fulfilling documentation requests?
The IRS does not require employers to calculate deductions — but it does assume records exist.
4. Be Ready to Explain What “Qualified Overtime” Actually Means
One of the most common misunderstandings is assuming all overtime pay qualifies for the deduction.
IRS Notice 2025-69 defines “qualified overtime compensation” as overtime pay in excess of the regular rate required under the Fair Labor Standards Act (FLSA) — commonly referred to as the premium portion of time-and-a-half.
For example, if an employee earns $20/hour and is paid $30/hour for overtime, the potential deductible amount relates to the $10 premium, not the full $30.
Prepared employers don’t debate eligibility — they simply explain the IRS definition accurately and consistently.
5. Quietly Confirm Employee Classification Is Correct
The OBBBA did not change wage-and-hour law. But because the overtime deduction is tied directly to FLSA overtime, misclassification now has downstream tax implications.
Only properly classified non-exempt employees can receive qualified overtime compensation under the IRS definition.
Preparation here doesn’t require sweeping changes — it requires confidence that classifications and overtime calculations already comply with existing law.
6. Decide Intentionally Whether to Provide Optional Disclosures
The IRS states in Notice 2025-69 that employers may, but are not required to, provide a separate accounting of qualified overtime compensation for 2025 — for example, in Box 14 of Form W-2 or on a separate statement.
If an employer chooses to do this:
- It should be done consistently
- It should be clearly labeled as informational
- It should not be framed as tax advice
If an employer chooses not to do this, that is equally compliant. The IRS explicitly allows individuals to determine amounts without employer-provided separate accounting.
Prepared employers make a decision — rather than reacting ad hoc.
7. Prepare Leadership for Eligibility Limits Without Over-Promising
While IRS Notice 2025-69 focuses on transition-year reporting, public summaries of the statute itself note that:
- The deductions are subject to limits and income-based phaseouts
- Occupational criteria apply for qualified tips
The IRS has not yet operationalized all numerical limits in finalized forms, so prepared employers avoid quoting exact figures as settled guidance.
Instead, they communicate clearly:
- Not everyone will qualify
- Deduction amounts may vary
- Eligibility is determined on the individual tax return
This protects trust and credibility.
8. Keep Federal and State Conversations Strictly Separate
The OBBBA applies to federal income tax only.
It does not override:
- State income tax rules
- State wage-and-hour laws
- State cannabis regulations
Prepared employers do not speculate about state conformity. Instead, they direct questions to official state agencies, using resources like:
- State tax authorities (via the Federation of Tax Administrators)
- State labor departments (via the U.S. Department of Labor)
- State cannabis regulators (via NCSL directories)
Clarity beats assumptions — especially for multi-state operators.
9. Assign Someone to Monitor IRS Updates for 2026 Reporting
The IRS has stated that reporting will change for tax year 2026 (wages earned in 2026 and reported in early 2027), and has already released early draft materials marked “DRAFT — NOT FOR FILING.”
Prepared organizations don’t guess what those changes will be — they monitor IRS releases and wait for finalized instructions.
This can be as simple as assigning one person to track IRS updates and flag changes when they are official.
10. Train Teams to Stay in Their Lane — and That’s a Good Thing
Perhaps the most underrated preparation step is role clarity.
According to IRS guidance:
- The individual taxpayer claims the deduction
- The employer provides records
- The employer does not determine eligibility or calculate deductions
Prepared teams understand this boundary.
HR explains the basics without advising.
Payroll provides documentation without interpreting.
Leadership reinforces that tax professionals — not employers — determine outcomes.
That restraint is compliance.
The One Big Beautiful Bill Act didn’t disrupt cannabis payroll — it reframed the value of accuracy.
In 2026, preparedness isn’t about chasing loopholes or selling benefits. It’s about understanding what the IRS has said, supporting employees with facts, and positioning your business ahead of the next reporting phase without guessing.
In an industry shaped by uncertainty, that kind of clarity is leadership.
The Questions Everyone’s Asking
“Are tips tax-free now because of the One Big Beautiful Bill?”
No. The IRS does not describe tips as tax-free. Under IRS Notice 2025-69, certain qualified tips may be eligible for a federal income tax deduction that an individual claims when filing their tax return. Tips are still reported as income, and payroll withholding was not changed for 2025.
“Why didn’t my paycheck change in 2025 if this law started then?”
Because the IRS designated 2025 as a transition year. According to IRS News Release IR-2025-82, withholding tables and payroll reporting forms were not updated for 2025. The benefit appears when an individual files their 2025 tax return in 2026, not on the paycheck itself.
“Does all overtime qualify for the deduction?”
No. IRS Notice 2025-69 defines qualified overtime compensation as the portion of overtime pay that is in excess of the regular rate required under the Fair Labor Standards Act (FLSA)—often referred to as the premium portion of time-and-a-half. The entire overtime paycheck does not qualify.
“Do I need a special W-2 to claim this deduction?”
Not for 2025. The IRS explicitly states that separate accounting for qualified tips and overtime may not appear on 2025 W-2s. Individuals may use pay statements, earnings records, or other reasonable documentation to determine amounts when filing their return.
“What if my employer didn’t give me a breakdown of overtime or tips?”
The IRS anticipated this. Notice 2025-69 allows individuals to use reasonable methods and available documentation to calculate deductible amounts for 2025. Employers were not required to provide separate accounting for that year.
“Is my employer responsible for calculating or approving my deduction?”
No. The IRS places responsibility for claiming the deduction on the individual taxpayer. Employers may provide records, but they do not determine eligibility or calculate the deduction.
“Will this affect my state taxes too?”
Not automatically. The OBBBA applies to federal income tax only. State income tax treatment depends on whether a state conforms to federal rules. The IRS does not govern state tax treatment.
“Will this change again in 2026 or 2027?”
Yes, but carefully. The IRS has stated that reporting will change for tax year 2026 (wages earned in 2026, reported in early 2027). Final forms and instructions will be released by the IRS. Until then, employers should follow official IRS updates—not assumptions.
Go Straight to the Source
When it comes to the One Big Beautiful Bill Act, clarity matters more than commentary. The most reliable way to understand what applies to you — and what doesn’t — is to reference the agencies responsible for enforcing and interpreting the law.
Below are the primary authorities the IRS and federal government expect taxpayers and employers to rely on. These sources are designed to answer follow-up questions accurately, without speculation or oversimplification.
Internal Revenue Service (Primary Authority)
If you want to understand how the Big Beautiful Bill treats tips and overtime at the federal income tax level, start here.
IRS Notice 2025-69 — Official Guidance on Tips & Overtime Deductions
This notice explains how the IRS interprets the new deductions, why 2025 was treated as a transition year, and how individuals may determine deductible amounts when separate reporting does not appear on 2025 forms.
https://www.irs.gov/pub/irs-drop/n-25-69.pdf
IRS News Release IR-2025-82 — No 2025 Payroll Form or Withholding Changes
This release confirms that federal withholding tables and key information returns (including Forms W-2 and 1099) were not changed for tax year 2025 under the phased implementation of the law.
https://www.irs.gov/newsroom/irs-announces-no-changes-to-individual-information-returns-or-withholding-tables-for-2025-under-the-one-big-beautiful-bill-act
IRS Forms & Instructions Hub
This is the IRS’s central location for official forms, instructions, and updates — including finalized changes as they are released for future tax years.
https://www.irs.gov/forms-instructions
These IRS resources are the foundation. If a claim or interpretation isn’t supported here, it’s not authoritative.
Wage & Hour Law (Federal Labor Authority)
The One Big Beautiful Bill Act does not change wage-and-hour law. Overtime eligibility, classification rules, and timekeeping requirements remain governed by the Fair Labor Standards Act (FLSA).
For federal guidance on overtime and labor standards, use:
U.S. Department of Labor — Wage and Hour Division (Overtime & FLSA Guidance)
https://www.dol.gov/agencies/whd/overtime
This is the appropriate source for understanding:
- What qualifies as overtime under federal law
- How the “regular rate” is defined
- Why only the overtime premium portion is referenced in IRS guidance
State Tax Administration (Income Tax & Conformity)
Because the Big Beautiful Bill applies to federal income tax only, state tax treatment may differ. States may conform fully, partially, or not at all.
Rather than relying on summaries, the most accurate approach is to consult your state’s tax authority directly.
Federation of Tax Administrators (FTA) — State Revenue Agency Directory
https://www.taxadmin.org/state-tax-agencies
This directory links to each state’s official tax agency, where you can confirm:
- State income tax conformity
- Filing rules and guidance
- Any state-level notices issued after federal changes
Cannabis Policy & State Regulatory Context
Employment and payroll practices in cannabis businesses often intersect with state cannabis regulations, even when the tax issue itself is federal.
For a non-regulatory but authoritative overview of state cannabis programs:
National Conference of State Legislatures (NCSL) — Cannabis Overview
https://www.ncsl.org/civil-and-criminal-justice/cannabis-overview
This resource helps you identify:
- Your state’s cannabis regulatory authority
- Governing statutes and program structures
- Legislative updates that may affect cannabis employers
State-Specific Help: When You Need Answers That Depend on Location
If you’re unsure how the Big Beautiful Bill applies in your state, these official agencies are the best next stop — before assumptions turn into compliance issues. Because treatment varies, the most responsible next step is to go directly to the agencies that enforce the rules — not second-hand summaries.
Find Your State Tax Agency
(Income tax conformity, state filing rules)
https://www.taxadmin.org/state-tax-agencies
Find Your State Labor Office
(Overtime rules, classification, recordkeeping)
https://www.dol.gov/agencies/whd/state/contacts
Find Your State Cannabis Regulator
(Industry-specific employment or compliance rules)
https://www.ncsl.org/civil-and-criminal-justice/cannabis-overview
This is the moment where most cannabis operators can either feel overwhelmed — or supported so if you’re one of them, that’s natural. However, we need you to remember this:
The One Big Beautiful Bill Act didn’t disrupt cannabis payroll — it reframed the value of accuracy.
In 2026, preparedness isn’t about chasing loopholes or selling benefits. It’s about understanding what the IRS has said, supporting employees with facts, and positioning your business ahead of the next reporting phase without guessing.
In an industry shaped by uncertainty, that kind of clarity is leadership.
“The One Big Beautiful Bill Act doesn’t reward speed. It rewards accuracy, patience, and clarity — especially in industries like ours, where thoughtful preparation isn’t optional, it’s essential.
For businesses looking for that kind of steadiness, there are partners in the cannabis space — including us — who are prepared to support that work with care, accuracy, and respect for the complexity involved.”
