2026 Regulatory Issues: Top Compliance Issues Businesses Should Know

As businesses close out 2025, many leaders are hoping for a more predictable year ahead. The reality, however, is that 2026 introduces one of the most complex regulatory environments employers have faced in years. From sweeping tax changes and the lingering impact of a federal government shutdown to expanding state retirement mandates, paid leave laws, and fast-moving artificial intelligence regulation, compliance obligations are becoming broader—and more fragmented.

At the same time, limited federal legislative action has pushed states to take the lead in many policy areas, creating a patchwork of requirements that businesses must now manage across jurisdictions. Employers that remain agile, informed, and proactive will be best positioned to adapt without disruption.

Below is a comprehensive overview of the top regulatory issues shaping 2026 and what businesses should be preparing for now.

Major Tax and Tax-Related Issues Heading Into 2026

Taxes remain one of the most significant areas of uncertainty for employers. The most consequential development is the 2025 tax law, commonly referred to as the One, Big, Beautiful Bill Act, which introduced changes affecting both individual taxpayers and employers’ administrative responsibilities.

No Tax on Tips and No Tax on Overtime

Two widely discussed provisions allow workers to deduct certain compensation when filing personal income tax returns for tax years 2025 through 2028. While these deductions apply to employees—not employers—they create new reporting and tracking complexities.

For overtime, only the overtime premium portion (the “half” in time-and-a-half) required under the Fair Labor Standards Act qualifies. Overtime paid beyond federal FLSA requirements, including more generous state rules, is excluded. The deduction is capped at $12,000 for individuals and $25,000 for joint filers.

For tips, only voluntary tips qualify. Mandatory service charges do not. Eligible occupations are defined under the Treasury Tipped Occupation Code, which includes nearly 70 roles. The deduction is capped at $25,000 annually, and married individuals must file jointly to claim it.

Employers are still responsible for withholding and remitting payroll taxes, including FICA. The biggest change is in data tracking and reporting, not tax liability.

While draft forms exist, employers should note:

• The 1040 will change in 2025 for 2026 filing

• W-2 and 1099 forms will not change until 2026 for 2025 reporting

• The IRS announced it would not assess penalties for reporting deficiencies in 2025, though employers are encouraged to provide information where possible

State conformity adds another layer of complexity. Several states, including Colorado, New Jersey, New York, Illinois, Maine, and Washington, D.C., have already taken action to either decouple or selectively adopt these provisions.

Other Notable Tax Changes Affecting Businesses

A retroactive provision effective January 1, 2025, allows businesses to fully expense qualified domestic research and development costs in the year incurred. This reverses the prior amortization requirement and can materially improve cash flow.

Qualified expenses include activities related to developing or improving products, software, processes, or inventions. Businesses may still choose to amortize costs over five or ten years if preferred.

Small businesses also benefit from a transitional rule allowing unamortized R&D costs from 2022–2024 to be deducted in 2025 or spread across 2025 and 2026.

Another key issue is the Work Opportunity Tax Credit (WOTC), which is scheduled to expire on December 31, 2025. This long-standing credit—worth between $1,200 and $9,600 per eligible hire—incentivizes hiring from targeted populations such as veterans, SNAP recipients, and formerly incarcerated individuals. No extension has been enacted, though a retroactive renewal remains possible.

Fallout From the Federal Government Shutdown

The longest shutdown in U.S. history ended on November 12, 2025, after 43 days. While funding has been secured for some agencies through fiscal year 2026, Congress must still pass the remaining appropriations bills by January 30, 2026, or risk another partial shutdown.

One of the most critical unresolved issues is the expiration of enhanced Affordable Care Act premium subsidies on December 31, 2025. Changes here could affect individual marketplace enrollment and potentially impact Employer Shared Responsibility exposure for Applicable Large Employers.

The shutdown also resulted in an estimated $7–14 billion in permanent economic losses and disrupted access to funding programs, including Small Business Administration loans. Employers should be prepared for continued uncertainty tied to federal budget negotiations.

Employment Law Changes Employers Must Watch Closely

Employment regulation remains highly fluid, with the possibility of sharp policy reversals at both federal and state levels.

Minimum Wage Increases

Nearly 20 states will implement minimum wage increases in 2026, many effective January 1, 2026. Local jurisdictions—especially in California and New York—may impose even higher rates. These increases affect payroll costs, budgeting, and workforce planning.

Paid Sick Leave Laws

More than a dozen states and Washington, D.C., already mandate paid sick leave, and several are expanding coverage in 2026. Examples include:

• California, expanding eligibility to include victims of serious crimes

• Connecticut, lowering employer coverage thresholds

• Oregon, expanding qualifying reasons to include blood donation

Employers operating in multiple states must manage varying accrual rules, notice requirements, and recordkeeping standards.

Paid Family and Medical Leave (PFML)

Thirteen states and Washington, D.C., now have mandated PFML programs. Several, including Delaware, Maine, Minnesota, and Maryland, require employer registration or contributions beginning in 2026. Employers may need to budget for payroll deductions, manage leave coordination, or consider private plan alternatives.

Worker Classification and Overtime Rules

Worker classification remains a high-risk compliance area. Although the 2024 Department of Labor Independent Contractor Rule technically remains in effect, enforcement has reverted to earlier guidance. Businesses must still navigate overlapping federal, state, and local tests, many of which vary by industry.

The federal overtime rule remains unchanged for 2026, with the $684 weekly salary threshold under the 2019 rule still in place. Employers considering workforce reclassification should act early to ensure accurate overtime tracking—especially given the new tax reporting requirements tied to overtime compensation.

Retirement Mandates and Changes on the Horizon

State-mandated retirement programs continue to expand. Thirteen states already have fully active programs, with others rolling out registration deadlines in late 2025 and throughout 2026. Employers may need to either enroll in a state program or adopt a private retirement plan that satisfies the mandate.

Looking ahead, SECURE Act 2.0 introduces a major change to the Saver’s Credit beginning in 2027, converting it into a Saver’s Match—a direct federal contribution deposited into a worker’s retirement account. Employers sponsoring retirement plans may need to coordinate with recordkeepers to accommodate these deposits and communicate changes to employees.

Artificial Intelligence: Regulation Accelerates in 2026

Artificial intelligence is increasingly embedded in payroll, recruiting, performance management, and compliance systems. While AI offers efficiency and insight, regulation is struggling to keep pace.

On December 11, 2025, the president signed an executive order authorizing the Department of Justice to pre-empt certain state AI laws, potentially limiting states’ ability to regulate AI under specific circumstances. This could reshape how AI compliance is enforced nationwide.

For now, states remain highly active in AI legislation. Key focus areas include:

• Restrictions on deepfakes

• Disclosure requirements when AI is used

• Privacy protections

• Regulation of automated decision-making in employment

Notably, amendments to the California Consumer Privacy Act (CCPA) take effect January 1, 2026, imposing new obligations on employers using automated decision-making tools without meaningful human involvement. These include risk assessments, advance notices, and opt-out rights.

How Businesses Can Mitigate Regulatory Risk in 2026

With regulatory change accelerating, businesses should consider a multi-layered compliance strategy, including:

• Consulting with legal and financial advisors

• Leveraging technology to track regulatory updates

• Upgrading payroll, recruiting, and HR systems

• Training staff on new technologies, including AI

• Partnering with experienced HR and benefits advisors

Staying compliant in 2026 will require planning, coordination, and expert guidance—not reactive decision-making.

Final Takeaway

The regulatory environment heading into 2026 is complex, fragmented, and evolving quickly. Employers that remain informed and proactive will be better positioned to manage risk, control costs, and support their workforce without disruption.

At Taylor Benefits Insurance Agency, we help businesses align compliance obligations with broader benefits and workforce strategy—so regulatory change becomes manageable, not overwhelming.