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It’s tax season. Refunds are up. And employees are paying closer attention to their finances than they have in months.
According to early IRS filing data, the average federal tax refund through early February 2026 was approximately $2,290 — up roughly 11% from the same period in the prior year, with more recent weekly data showing average refunds continuing to climb. The increase is widely attributed to changes enacted under the One Big Beautiful Bill Act (OBBB).
The OBBB was signed into law on July 4, 2025, and introduces a range of tax changes that directly affect employees’ paychecks, benefits elections, retirement planning, and withholding decisions. The Internal Revenue Service (IRS) has published multiple guidance releases outlining these provisions and their effective dates.
Several of these changes apply beginning in tax year 2025 — meaning employees may benefit when filing their 2025 returns this spring (due April 15, 2026).
According to ADP, the OBBB “included a number of provisions related to wages and benefits, such as increased tax incentives for child-care benefits and paid family leave,” along with changes to the federal tax treatment of overtime and tips starting in 2025.
For HR and benefits leaders, this isn’t just a compliance update. It’s a high-attention financial moment.
When employees are thinking about refunds, deductions, and take-home pay, they are thinking about financial wellbeing. That makes HR and benefits teams the unexpected front line of tax season in 2026.
Note: This article is intended for general informational purposes and is not tax advice. Employees should consult a qualified tax professional regarding their individual circumstances.
Below is a practical, scannable breakdown of the key provisions employees are most likely to ask about.
According to the IRS and guidance summarized by AARP, employees in qualifying tipped occupations may deduct up to $25,000 of cash tips per year as an above-the-line deduction on their federal tax return.
The IRS has issued guidance identifying eligible occupations where workers “customarily and regularly receive tips.” Tips remain subject to FICA and payroll tax withholding.
Only voluntary tips in eligible occupations qualify for the deduction.
HR implication:
If your organization employs tipped workers, employees should understand that this deduction is claimed on their individual tax return and does not change payroll withholding requirements. Payroll teams should be prepared to answer high-level questions, and benefits teams may want to provide links to official IRS guidance.
According to IRS guidance summarized by AARP, employees may deduct up to $12,500 of qualifying overtime premium pay ($25,000 for married filing jointly).
Importantly, the IRS clarifies that only the “half” portion of time-and-a-half pay — the premium above base wages — qualifies for the deduction.
The deduction phases out for individuals earning more than $150,000 ($300,000 for joint filers). Only overtime as defined under the federal Fair Labor Standards Act (FLSA) qualifies, which may differ from certain state overtime definitions.
HR implication:
Nonexempt employees who regularly work overtime may benefit from this provision. For multistate employers, federal and state overtime calculations may not align, so coordination between payroll and compliance teams is essential.
According to IRS guidance on OBBB provisions, taxpayers may deduct up to $10,000 in qualified auto loan interest for tax years 2025 through 2028, subject to income phaseouts beginning at $100,000 for single filers and $200,000 for joint filers.
To qualify, the vehicle must be new (used vehicles are not eligible), purchased for personal use, and must have undergone final assembly in the United States. Taxpayers can verify assembly location using the vehicle's window sticker or the National Highway Traffic Safety Administration's VIN Decoder. Lenders are required to provide borrowers with a statement of total interest paid by January 31 of the following year.
HR implication:
This is broadly relevant and easy to communicate. A simple reminder encouraging employees to retain lender statements and consult a tax advisor may increase awareness without increasing compliance risk.
According to ADP, the annual pretax contribution limit for dependent care flexible spending accounts (FSAs) increased from $5,000 to $7,500 for joint filers, effective January 1, 2026. This represents the first permanent increase to the limit since 1986, aside from a temporary increase under the American Rescue Plan for tax year 2021.
According to Paychex, “Given that the limit has remained stable for forty years, employers should make the new higher limit an open enrollment communications priority.”
HR implication:
This directly affects benefits elections and take-home pay. If employees did not adjust their elections during open enrollment, they may not be maximizing available pretax savings. Benefits teams should review plan documents and communications to ensure alignment with the new limit.
According to the IRS’s 2026 inflation adjustments, the standard deduction increases to $32,200 for married couples filing jointly and $16,100 for single filers for tax year 2026.
The IRS has also published updated withholding tables reflecting these changes. Employees may wish to review and update their Form W-4 to ensure appropriate withholding based on new deduction thresholds.
HR implication:
Employees who do not update withholding may over-withhold or under-withhold relative to their new tax profile. While employers should not provide tax advice, directing employees to IRS withholding calculators or official forms can be helpful.
According to the IRS, the elective deferral limit for 401(k) plans increases to $24,500 for 2026.
Under the SECURE 2.0 Act, employees aged 60–63 may make an additional “super catch-up” contribution of up to $11,250, bringing the total possible elective deferral amount to $35,750, assuming plan provisions allow the full catch-up contribution.
Beginning in 2026, employees aged 50 and older whose prior-year FICA wages exceeded $150,000 must direct catch-up contributions to a Roth (post-tax) basis.
HR implication:
This requires coordination between HR, payroll, and retirement plan administrators. Employers must accurately track which employees are subject to the Roth catch-up requirement and update communications accordingly.
According to the IRS, the OBBB significantly enhanced the employer-provided childcare tax credit, increasing the maximum credit from $150,000 to $500,000 — or $600,000 for eligible small businesses — beginning in tax year 2026.
HR implication:
For employers evaluating on-site childcare, childcare stipends, or partnership programs, the financial equation has shifted. Total rewards leaders may wish to revisit the business case in light of the expanded credit.
According to the IRS’s 2026 inflation adjustments, the monthly exclusion for qualified transportation fringe benefits and qualified parking increases to $340 per month, up $15 from 2025.
Amounts within the exclusion are not subject to federal income tax or FICA.
HR implication:
This is a straightforward communication opportunity, particularly for employees with significant commuting costs.
Individually, these changes may appear manageable.
Collectively, they represent meaningful operational complexity.
According to InfinitiHR, “2026 brings substantial shifts across payroll, benefits, and compliance,” noting that employer withholding tables, retirement contribution limits, and other thresholds have changed simultaneously.
Multistate employers face additional complexity, according to ADP: “For multistate employers where overtime is calculated differently by state, start early to prepare for end-of-year reporting and establish practices for tracking overtime in all the locations you have employees.”
According to BambooHR, HR, payroll, and benefits administrators must “accurately track which employees fall under” the new Roth catch-up provision and communicate those changes clearly.
These are not isolated tax updates. They intersect with:
When payroll, compliance, and benefits communications shift at the same time, coordination becomes critical.
Most employees will not proactively monitor IRS releases or tax law changes.
But they do pay attention to their refund.
Tax season creates a rare alignment of awareness and motivation. Employees are looking at their paystubs. They are reviewing deductions. They are asking questions.
This is an opportunity for HR and benefits teams to:
One-size-fits-all communication is unlikely to resonate equally across a diverse workforce. The overtime deduction matters most to nonexempt workers. The dependent care FSA increase matters most to working parents. The super catch-up provision is relevant only to a specific age band.
When financial rules shift, personalization becomes essential.
The organizations that proactively translate complexity into clear, role-relevant guidance are the ones employees remember — especially when it affects their paycheck.
The OBBB is one example of how quickly the regulatory landscape can change.
At the same time, state-level mandates continue to expand — including paid family leave programs rolling out in states such as Delaware, Maine, and Minnesota — adding further coordination requirements for multistate employers.
According to InfinitiHR, the 2026 environment represents “substantial shifts across payroll, benefits, and compliance.” That trend is unlikely to reverse.
The HR teams that build the muscle to navigate coordinated change — across payroll, benefits, and employee communication — will be better positioned for what comes next.
Because employees do not experience tax law in isolation.
They experience it through their paycheck.
Through their benefits elections.
And through the clarity — or confusion — they receive from their employer.
In 2026, clarity may be one of the most valuable benefits you provide.
