OBBBA in 2026: What Massachusetts Employers Must Do Now
The reporting change everyone is worried about lands on W-2s filed in January 2027. That is not the deadline that should worry you. The deadline that should worry you is that those forms describe payments you are making right now, and two of the three new fields cannot be reconstructed in January from a payroll file that was not capturing them in August.
That is the implementation problem in one sentence. Below: exactly what the 2026 W-2 asks for, the one field almost every payroll system will fill in wrong, why the 2025 penalty relief does not help you, and a Massachusetts trap in the new federal paid-leave credit that will cost MA employers money if they assume the obvious thing.
Key Takeaways
- The 2026 Form W-2 adds box 12 code TP (cash tips reported to the employer) and code TT (qualified overtime), and splits box 14 into 14a and 14b, the Treasury Tipped Occupation Code.
- Only the premium half of time-and-a-half goes in code TT. The IRS instructions say so explicitly. Reporting the full overtime payment is the error to check for first.
- The 2025 penalty relief is over. Notice 2025-62 covered tax year 2025 only. Separate reporting is required for 2026 and later.
- Massachusetts PFML contributions do not earn the federal section 45S credit. Notice 2026-28 confirms premiums for leave required by state law are not creditable coverage.
- Section 179 sits at $2,560,000 for 2026, 100% bonus depreciation is permanent, and the 20% QBI deduction no longer expires.
The two new box 12 codes, and the one most systems will get wrong
The 2026 Form W-2 carries two new codes, and their definitions are narrower than the shorthand suggests.
Code TP is “Total amount of cash tips reported to the employer.” Not “qualified tips” — that phrase appeared on the August 2025 draft and is still repeated widely, but the final instructions ask for cash tips reported to you (IRS, 2026 General Instructions for Forms W-2 and W-3, retrieved 2026-08-11). You are not being asked to decide whose tips are deductible. You report what was reported to you, and box 14b records which occupation it came from.
Code TT is where the money is lost. Qualified overtime is compensation required under section 7 of the Fair Labor Standards Act “that is more than the regular rate at which the individual is employed.” The instructions give the example directly: only the “half” portion of “time-and-a-half” compensation is reported using code TT.
If your payroll system reports the full $45.00, every affected employee’s return starts from a number three times too large. That is the check worth running this week: pull one overtime employee and confirm the figure earmarked for TT is the premium, not the payment.
Two more limits. The deduction it feeds is capped at $12,500, or $25,000 on a joint return, for tax years beginning after 2024 and ending before 2029. And because the test is FLSA section 7, overtime you pay only because a state statute or a contract requires it is not qualified overtime and does not belong in TT. Massachusetts runs its own overtime law with its own exemption list, so “we pay overtime” and “we pay FLSA section 7 overtime” are not the same statement for every person on your payroll.
The occupation code is mandatory, and it is per employee
Box 14 has been split. What used to be box 14 — Other is now box 14a — Other, and box 14b was created to carry the Treasury Tipped Occupation Code.
This is not optional where tips exist. The instructions attach it directly to code TP: you must also list an occupation code in box 14b. The deduction it supports reaches up to $25,000 of qualified tips, and applies only to occupations the IRS has listed as having customarily and regularly received tips on or before 31 December 2024.
The practical consequence for a restaurant, salon or bar is that occupation now has to live in the payroll record as a code, per employee, for the whole year. A server who moved to a bartending role in March is two occupation codes across one W-2 year, and nobody remembers that in January. This is a payroll setup question to settle now, not a filing question.
The 2025 penalty relief does not carry forward
For tax year 2025, employers were not required to separately report qualified overtime (IRS, Questions and answers about the new deduction for qualified overtime compensation, retrieved 2026-08-11). Notice 2025-62 made 2025 a transition year.
That relief was written for 2025 and only 2025. For tax years 2026 and later, employers and other payers are required to separately report qualified overtime on Forms W-2, 1099-NEC and 1099-MISC. The 1099-NEC inclusion matters more than it looks: the obligation follows the payment, not the worker’s classification.
Massachusetts PFML contributions do not earn the federal credit
This is the one that will cost MA employers money, because the obvious reading is the wrong one.
OBBBA made the section 45S employer credit for paid family and medical leave permanent and added a new way to claim it: an employer maintaining a PFML insurance policy may elect to compute the credit on premiums paid rather than on wages paid to employees actually on leave (IRS Notice 2026-28). It also narrowed qualifying employees to those customarily employed at least 20 hours per week, and lets an employer elect to include them after six months rather than a year.
Read that quickly and a Massachusetts employer concludes: I pay PFML premiums to the Commonwealth, so I can claim a credit on them. You cannot.
Notice 2026-28 answers this directly. A premium is not paid for creditable coverage if it is for coverage with respect to leave required by state or local law or paid for by a state or local government. Separately, while OBBBA amended section 45S(c)(4) so that state-mandated leave now counts toward deciding whether you are an eligible employer at all, such leave “continues not to be taken into account for purposes of calculating the amount of the credit.”
So Massachusetts PFML does two different things to your federal credit. It helps you qualify. It earns you nothing. The credit is available only on leave, or premiums, that go beyond what the Commonwealth already requires.
There is a second Massachusetts development underneath this. The Commonwealth has enacted Chapter 101 of the Acts of 2026, shifting employer contributions from medical leave to family leave from 1 January 2027 — and mass.gov states plainly that the change is intended to mitigate the impact of recent IRS guidance on the tax treatment of Massachusetts PFML benefits. The federal and state rules are now reacting to each other, which is a reason to review this annually rather than set it once.
What did not change, and is worth using
Three OBBBA provisions are settled, generous, and easy to miss while the reporting noise is loud.
| Provision | 2026 position | Source |
|---|---|---|
| Section 179 expensing | $2,560,000 cap; phase-out begins at $4,090,000 | Rev. Proc. 2025-32 § 4.24 |
| Bonus depreciation | 100%, permanent, for property acquired after 19 Jan 2025 | P.L. 119-21 |
| QBI deduction | 20%, permanent. Sunset removed; $400 minimum added | P.L. 119-21 § 70105 |
| Section 45S PFML credit | Permanent; new premium method | Notice 2026-28 |
The pass-through deduction is the one to raise with whoever prepares your return, because the widely repeated claim that it rose to 23% describes the House version of the bill and never became law. The rate is 20%. There is more detail in 10 ways small businesses can save money in 2026.
What to do before December
- Check one overtime payslip. Confirm your system has isolated the premium portion for code TT, not the whole payment.
- Add occupation codes to the payroll record if you have tipped staff, and capture changes as they happen rather than reconstructing them.
- Ask your payroll provider, in writing, whether their 2026 W-2 output populates TP, TT and 14b. “We’re OBBBA compliant” is not an answer to that question.
- Separate your MA PFML contributions from any voluntary leave you fund, because only the second can support a section 45S credit.
- Reconcile before year end. Every item above is cheap to fix in August and expensive to fix against a filing deadline.
How this was checked
Every figure here comes from a primary source: the IRS 2026 General Instructions for Forms W-2 and W-3, the IRS questions and answers on the qualified overtime deduction, IRS Notice 2026-28, Revenue Procedure 2025-32, the enacted text of Public Law 119-21, and the Massachusetts Department of Family and Medical Leave. Nothing is taken from another article’s summary of those documents.
That mattered twice while writing this. Code TP is widely described as “total amount of qualified tips”; the final instructions say cash tips reported to the employer. And the pass-through deduction is widely reported at 23%; the enacted law kept it at 20%.
Green Books Inc is a bookkeeping practice in Hudson. This is general information about published rules, not tax advice, and not a review of your situation. It does not account for your entity type, your workforce, or your filings beyond Massachusetts. Figures were retrieved on 11 August 2026 and the rules are moving: Notice 2026-28 is guidance ahead of proposed regulations, and Chapter 101 changes the Massachusetts split again in 2027.
Frequently asked questions
Do I have to do anything differently on the paychecks I am running this month?
Not to the payment itself — what people are paid does not change. What changes is what your payroll system must be recording alongside it: the overtime premium as a separate figure, and a tipped occupation code per employee. Both are needed for the W-2 you file in January 2027, and neither can be reliably reconstructed afterwards.
We only have a handful of employees. Does the tipped occupation code still apply?
Yes, if you have tipped staff. There is no small-employer exception to the box 14b requirement. The Massachusetts PFML employer contribution does have a size threshold — under 25 covered individuals there is no employer share — but that is a state contribution rule and has nothing to do with W-2 reporting.
Can we claim the federal paid-leave credit on our Massachusetts PFML contributions?
No. Notice 2026-28 states that a premium is not creditable coverage if it is for leave required by state or local law. Massachusetts-mandated leave can help establish that you are an eligible employer, but it does not feed the credit calculation. Only leave or premiums beyond the state requirement can.
Our payroll is outsourced. Is this their problem or ours?
The filing obligation is yours. A provider that populates the new fields correctly makes it easy; one that does not leaves you filing incorrect returns under your own EIN. Ask them specifically about codes TP and TT and box 14b, and keep the answer in writing.
Start with the payslip
The reporting change is administrative, not expensive — provided the data exists. It stops being administrative the moment January arrives and the occupation codes were never recorded.
If you want someone to check what your payroll output actually contains against what the 2026 W-2 requires, book a consultation and we will go through it against your real records. If your books are behind, that comes first — see bookkeeping and tax preparation.