Employment Tax

United States | Overview of key employment tax topics in 2026

Summary

With the new year brings new changes and challenges for employers and payroll tax professionals. This Alert highlights a few recent developments in Employment Tax related to federal withholding and reporting requirements for state PFML programs, considerations for employers that are facing a 27-pay period year, and additional guidance from the IRS on the qualified overtime compensation deduction.

The detail

IRS Extends Transition Period for States to Implement Changes to Paid Family Medical Leave Process

The IRS released Notice 2026-6 extending the transition period provided in Revenue Ruling 2025-4 to include calendar year 2026 for States administering paid family and medical leave programs and employers participating in such programs. The extended transition period will give States and employers additional time to make the necessary changes to their systems to comply with the tax and information reporting responsibilities set forth in Revenue Ruling 2025-4.

For medical leave benefits a State pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions:

• Federal Income Tax Reporting, Withholding, and Information Reporting Relief: a State or an employer is not required to follow the income tax withholding and reporting requirements applicable to third-party sick pay, and thus will not be liable for any associated penalties under § 6721 for failure to file a correct information return or under § 6722 for failure to furnish a correct payee statement to the payee.
• FICA Reporting and Withholding, and Federal Unemployment Tax (FUTA) Relief: a State or an employer is not required to comply with § 32.1 (relating to FICA tax with respect to payments on account of sickness or accident disability) and related Code sections, as well as similar requirements under § 3306 with respect to FUTA. As such, during the calendar year a State or an employer is not required to withhold and pay associated taxes and consequently will not be liable for any associated penalties.

Note, while the IRS is providing transition relief for States and employers related to the federal reporting and withholding responsibilities in these circumstances, some States have already implemented procedures to comply with the federal requirements. It’s important to review the applicable state guidance to ensure you are complying with state-specific requirements.

Tips for Handling the 27th Pay Period

Depending on when an employer’s pay periods fall, certain employers with biweekly pay periods are facing a 27-pay period year in calendar year 2026. Employers have options on how to handle the 27th pay period, including paying the employee’s regular biweekly salary in full on the 27th pay period (resulting in increased payroll costs), or reducing the employee’s per pay period salary so the 27th pay period does not result in increased annual pay, however this option will generally result in increased administrative burdens around adjusting salaries, vacation accruals, benefit deductions, etc., and the practical impact to employees of decreasing the amount of the employee’s biweekly payments.

The Latest Guidance on the Qualified Overtime Compensation Deduction

On January 23, 2026, the IRS released Fact Sheet FS-2026-01 with FAQs about the new qualified overtime compensation deduction. The FAQs provide guidance to individuals on topics such as determining if the individual is an FLSA overtime-eligible employee, links to IRS guidance on how to determine the individual’s deduction for qualified overtime compensation for 2025 if the employer does not provide the employee with a separate accounting of the qualified overtime compensation, and other rules and limitations that apply to the deduction.

How we can help

Vialto can assist you in complying with your responsibilities related to topics above, including reviewing state-specific PFML taxability and reporting requirements, assistance in evaluating options for handling a 27-pay period year from a payroll compliance and practical standpoint, and supporting employers in calculating the FLSA overtime paid for purposes of the qualified overtime compensation deduction.

Contact us

For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:

Tina Schrob
Partner

Priya Schwartzburt
Director

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