Employers Get Reporting Relief on Tips and Overtime
The IRS has granted employers transitional penalty relief for tax year 2025 related to new reporting requirements under the One Big Beautiful Bill Act (OBBBA). Under Notice 2025-62, employers will not be penalized if they do not separately report cash tips or qualified overtime compensation this year, although the underlying rules remain in place.
Why It Matters:
The relief provides temporary flexibility, but the new reporting framework will become enforceable in subsequent years. Payroll-intensive businesses must prepare for full compliance once penalties resume.
Actionable Steps:
- Evaluate clients’ payroll systems to ensure they can capture and report required tip and overtime data in the future.
- Encourage employers to begin voluntarily providing employees with detailed wage breakdowns now to avoid future data gaps.
- Track IRS updates to Form W-2, Form 1099, and related instructions ahead of the 2026 filing season.
IRS Increases 401(k) and IRA Contribution Limits for 2026
The IRS released cost-of-living adjustments for 2026 retirement plan contributions, raising the 401(k)-deferral limit to $24,500 and increasing the IRA contribution limit to $7,500. Catch-up contribution thresholds and certain phase-out ranges will also rise.
Why It Matters:
These adjustments directly affect tax planning, employment benefit strategies, and corporate retirement plan administration. Professionals must incorporate the updated limits into client projections and year-end planning discussions.
Actionable Steps:
- Update planning tools, calculators, and client materials to reflect the 2026 contribution increases.
- Proactively brief high-earning and small business clients on how the new limits affect their savings strategies.
- Coordinate with plan sponsors to ensure payroll providers and recordkeepers implement the revised contribution thresholds.
Roth 401(k) Catch-Up Contributions Will Shift In 2026
Beginning in 2026, certain high-income participants will be required to make catch-up contributions on a Roth basis under the SECURE 2.0 Act. Plans without a Roth option must add one to remain compliant.
Why It Matters:
This change affects retirement plan design, participant communication, and high-income tax strategy. Plan sponsors and advisors must prepare for increased administrative complexity and ensure affected employees understand the shift.
Actionable Steps:
- Identify employer-sponsored plans with catch-up eligible participants who may be subject to the Roth requirement.
- Advise plan sponsors without an existing Roth 401(k) feature to implement one promptly to maintain compliance.
- Develop communication materials to educate employees impact on after-tax contributions and their tax implications.
IRS Ends Direct File Program
The IRS has discontinued its Direct File pilot after one filing season and will instead invest in improvements to the Free File program and collaborations with private tax-software providers. The Direct File pilot served approximately 296,000 taxpayers in 25 states.
Why It Matters:
This decision reshapes the filing landscape, particularly for taxpayers who rely on low-cost or no-cost filing options. Professionals may need to guide clients toward alternative resources and understand how IRS-supported filing tools are expected to evolve.
Actionable Steps:
- Stay aware as the IRS is shifting resources away from taxpayer-facing filing programs.
- Educate clients who ask about free filing options that practitioner-prepared returns remain the recommended path.
- Monitor IRS Free File and private-sector updates that may affect e-filing.
Nearly 1,400 IRS Employees Receive Layoff Notices, Heightening Staffing Concerns
Approximately 1,400 IRS employees received reduction-in-force notices in 2025, adding to ongoing workforce reductions. The cuts raise further concerns about processing times, correspondence backlogs, and overall service levels as the next filing season approaches.
Why It Matters:
Reduced staffing may intensify delays in audits, notices, refunds, and taxpayer assistance, directly impacting client timelines and firm workflows. Professionals should anticipate extended response times from the IRS and adjust their expectations accordingly.
Actionable Steps:
- Inform clients that prolonged processing and response delays are likely throughout the 2026 filing season.
- Build additional buffer time into notice responses, amended returns, and correspondence workflows.
- Follow IRS updates regarding staffing and service levels to adjust client guidance as conditions evolve.