2026 Top Regulatory Issues: What Businesses Should Know

Update (Dec. 12, 2025): The president signs an Executive Order that calls for the pre-emption of certain state laws on artificial intelligence and blocking regulation of AI's development. See section below for more details.

Original article

Business owners spent the majority of 2025 dealing with inflation, tariffs, a labor market made flush by mass layoffs, funding accessibility, a federal government shutdown, and a single piece of legislation that had widespread tax implications.

What employers seek now is additional guidance from federal agencies to help them better understand potential compliance obligations. Meanwhile, as a result of limited legislation at the federal level, state governments have stepped in, adding a layer of obligations for business owners to navigate. So, it’s key business owners remain informed, and their businesses remain agile.

Paychex compliance analysts monitor legislation at the federal and state level that impacts businesses. They have compiled a list of topics, including key regulatory issues, to help better prepare employers and HR professionals for potential changes in 2026.

This information is for educational purposes only and should not be considered legal advice. Paychex recommends consulting with counsel before making any decisions that could affect your business.

What Are the 2026 Top Regulatory Issues?

Taxes and tax-related issues (e.g., tax changes, tariffs) will be ever-present in the new year among the challenges businesses have to prepare for, as will impacts of the federal government shutdown, retirement, artificial intelligence, and any number of employment law issues such as paid sick leave and worker classification.

Impacts of the Tax Law

The biggest piece of legislation — the 2025 tax law, commonly referred to as the One, Big, Beautiful Bill Act — has far-reaching implications for businesses and individual taxpayers. In addition to changes regarding tax credits that could impact business cash flow, the two most talked about provisions actually have to do with individual tax returns: no tax on tips and no tax on overtime.

No Tax on Tips and Overtime

In summary, these provisions allow workers to take a deduction on qualified compensation from tax years 2025 through 2028 when filing their personal income tax returns. Each has unique stipulations.

On overtime:

• Only the overtime premium (the half portion on the time and a half under the Fair Labor Standards Act (FLSA) qualifies for the deduction subject to income limitations.
• Only wages that are required under FLSA qualify for the deduction. Overtime that is outside FLSA requirements or in excess of FLSA requirement, such as state-specific requirements that are more generous, must be excluded from the deduction.
• There are caps for the amount ($12,000 for an individual and $25,000 for joint filer) that can be claimed.

On tips:

• Tips must be voluntary to qualify, so involuntary tips such as service charges for parties of more than eight added to a customer’s restaurant bill are not eligible for the deduction.
• Only certain occupations qualify for the deduction. The Treasury Tipped Occupation Code (TTOC) includes almost 70 eligible occupations.
• The limit is $25,000 annually for all filers, but a married individual must file a joint return to claim the deduction.

Employers remain responsible for withholding taxes on tips and overtime compensation, including FICA, but the biggest change is the reporting requirements.

There are drafts of new tax forms, but while waiting for more guidance employers should know that the 1040 will change in 2025 for 2026 filing and the W-2 and 1099 will not change until 2026 (for 2025 filing). Businesses did get some relief from the IRS when it announced in November that penalties would not be assessed for reporting requirements in 2025. Employers are encouraged to provide information on tips and overtime compensation for that tax year but wouldn’t be required to do so nor face penalties until the 2026 tax year.

Some states, meanwhile, decoupled their tax code from the Internal Revenue Code as it relates to these provisions. Not all states follow the IRC as amended, so there are those that need to take action to decouple if they want remove these provisions and those that the action they take is only if they want to add these provisions to their tax code. At the date of publication, Colorado, New Jersey, New York, Illinois, Maine, and the District of Columbia have made moves regarding tips and overtime compensation related to state taxes and filing.

Business owners still need to understand how to track/calculate and report the amounts for their employees/contractors, and with all the complexities and limited guidance, they should consult with their financial advisors. None of these changes, however, have a direct impact on their business taxes.

Tax Changes

A crucial change that went into effect retroactively on Jan. 1, 2025, that benefits businesses is the immediate full expensing of qualified domestic research and development. This now gives businesses the ability to take a 100% deduction in the tax year the expenses were incurred. Qualified expenses include activities intended to discover information that eliminates uncertainty about the development or improvements of a product, process, software, formula, technique, or invention.

This provision removes the five-year amortization requirement. However, businesses do have the option to amortize qualified expenses over a 5- or 10-year period if they choose.

Certain small businesses also receive a break with the establishment of a transitional period that allows for unamortized amounts from tax years between 2022 and 2024 to deduct them in 2025 or across 2025 and 2026.

Businesses using the deduction could see a positive change in cash flow, which frees up money for investing in additional U.S.-based research and potentially more tax breaks.

Another major credit, but one currently scheduled to sunset Dec. 31, 2025, is the Work Opportunity Tax Credit (WOTC). This federal credit, which dates to the mid-1990s, has been extended several times. It provides a credit of $1,200 to $9,600 per employee hired from one of 10 targeted groups that have faced employment barriers. The amount of the credit depends on the group the employee falls under, the hours worked, and the qualified wages.

The targeted groups include but are not limited to qualified veterans, SNAP and TANF recipients, formerly incarcerated individuals, and qualified long-term unemployed individuals.

Again, this credit is scheduled to end without further legislation. It was not included in the tax law nor do any proposed bills exist to extend the credit. It is possible it could be included as a rider on a bill before the end of 2025 or it could be proposed as a separate bill in 2026 which, if passed, might include language to make the credit retroactive to Jan. 1 of that year.

The credit serves as an incentive to hire workers facing systemic barriers to employment. It also serves to diversify the workforce and can provide a potential source of cash flow for business owners.

Impacts of Federal Government Shutdown

On Nov. 12, 2025, the longest shutdown in U.S. history ended after 43 days. A bill signed into law provided funding for three of the 12 appropriation bills that keep the government running. Those agencies and departments with full funding will remain open through FY26, which ends Sept. 30, 2026. Congress now has until Jan. 30, 2026, to negotiate and pass the other nine appropriation bills or it faces a partial shutdown at that time.

One of the main sticking points that led to long shutdown is the enhanced health insurance premium subsidies under the Affordable Care Act expire Dec. 31, 2025. These enhanced subsidies help keep health insurance more affordable for individuals purchasing coverage in the government marketplaces, plus any change could impact the risk level for potential assessment under the Employer Shared Responsibility requirements for an Applicable Large Employer (ALE).

Businesses also must adjust to a smaller government, which has been reducing its workforce since January 2025 and tried to include mass layoffs during the shutdown that was reversed temporarily as a condition for reopening the government. No additional layoffs can occur through Jan. 30, 2026.

According to the nonpartisan Congressional Budget Office, an estimated $7 billion to $14 billion will be permanently lost because of the latest shutdown, while businesses also had to contend with funding issues due to a pause in loan accessibility from agencies such as the Small Business Administration.

What’s Ahead for Employment Law?

There are a number of potential areas under the employment law umbrella that businesses will have to take into account for 2026, including possible 180-degree swings in regulation requirements from the previous four years.

At the federal level, changes to worker classification could come into play, while the overtime rule is expected to remain as is. At the state level, businesses might have to prepare for changes to paid sick leave and paid family leave laws, as well as pay transparency laws and increases in minimum wage.

Nearly 20 states will have minimum wage increases going into effect in 2026, with a majority of those on Jan. 1, 2026. Additionally, some local jurisdictions in California, New York, and other major metropolitan areas will see hourly wages go up. For business owners, these changes will impact payroll, as well as budgeting and even potential hiring and growth plans.

Paid Sick Leave Laws

More than a dozen states (Alaska, Arizona, California, Colorado, Connecticut, Illinois, Maine, Maryland, Maine, Michigan, Minnesota, Nebraska, Nevada, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, and Washington, plus Washington, D.C.) have paid sick leave laws, as do some local jurisdictions. Virginia even has a limited use paid sick requirement for home health care. Businesses should note that several states have made modifications to their laws that take effect Jan. 1, 2026.

• California is expanding the eligible individuals to include victims of serious crimes, which could include time off needed for court appearances or even grand jury.
• Connecticut is expanding coverage for employers to include those with 11 or more employees, which lowers the current threshold from 25 employers.
• Oregon is expanding reasons for leave to include blood donation.

Paid Family and Medical Leave Laws

The following states and the District of Columbia have mandated Paid Family and Medical Leave programs:

• California
• Colorado
• Connecticut
• Delaware
• Maine
• Maryland (not set to begin contributions until 2027)
• Massachusetts
• Minnesota
• New Jersey
• New York
• Oregon
• Rhode Island
• Washington

Covered businesses in Delaware (Jan. 1, 2026), Maine (May 1, 2026), Maryland, and Minnesota (Jan. 1, 2026) might have to register with the state, budget for contributions, manage employees taking leave, or even consider a private plan. Employees in all those states except Maryland can start collecting benefits in 2026 (with start dates indicated in parentheses).

For paid sick leave and PFML, employers also continue to have to handle administration of accruals, notice requirements, tracking, and recordkeeping, while those doing business in multiple states have the added complexity of the administration of more than one state paid leave law.

Worker Classification

Properly classifying workers prevents potential lawsuits, fines, and damage to the reputation of a business. Presently, the 2024 U.S. Department of Labor Independent Contractor Rule remains in effect, although there are several legal challenges to it in the courts.

In May 2025, the DOL announced the rule would not be enforced, choosing to enforce the FLSA under Fact Sheet #13 from 2008. There was talk of rescinding the current rule or replacing it, and given the current administration, that would most likely result in a lean toward an employer-friendly rule.

Businesses also must contend with challenges presented by the laws at the federal, state, and local level, which include different tests in determining classification, sometimes even specific to an industry. Any businesses planning changes should consider conducting an audit and job analysis, as well as reclassification before the start of 2026. This would help ensure accurate tracking of overtime related to the new tax law provisions for no tax on overtime.

Overtime Rule

With lawsuits pending in two federal district courts after the 2024 Final Overtime Rule was vacated, the USDOL does not seem to be leaning toward any new rulemaking in 2026. At present, they are using the 2019 Overtime Rule, which uses a minimum salary threshold of $684 per week.

Any Changes for Retirement in 2026?

As 2025 closes out, there are 13 states with fully active mandated workplace retirement programs: California (although, the expansion to include businesses with 1-4 employees has a registration deadline on Dec. 31, 2025), Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts (non-profit businesses only), Nevada, New Jersey, Oregon, Vermont, and Virginia.

Minnesota plans to soft launch its program on Jan. 1, 2026, while New York has its first of three registration deadlines on March 18, 2026, and Rhode Island has a registration deadline on Dec. 12, 2025. Hawaii, New Mexico, Missouri (voluntary), and Washington (currently voluntary but switching to mandatory in 2027) enacted legislation but remain works in progress.

For employers in states where programs are establishing registration deadlines, you might need to sign up for the state-facilitated plan or arrange to implement a private plan that satisfies the mandate.

Changes to Saver’s Credit

SECURE Act 2.0 continues to have an impact on the retirement landscape, including triggering changes to the Saver’s Credit in 2027. Rather than a credit, it becomes a direct Saver’s Match. The Saver’s Credit currently is an incentive for low- and middle-income individuals to save for retirement, and it came in the form of a tax credit on a participant’s taxes.

In 2027, eligible participants will receive a federal matching contribution deposited to their IRA, retirement account, or employer-sponsored plans that adopt the Saver’s Match based on the individual’s contributions the prior year. The participant must claim the match on their tax return and then the Treasury will make a deposit in their account. Employers that sponsor retirement plans, including 401(k) plans, that wish to accept Saver's Match contributions into their plan will need to work with their recordkeeper to amend their plan and enable funds to transfer directly to the qualifying individual retirement accounts.

Employers could get questions from employees when the time comes, especially if the transfer isn’t seamless. It also could create some employee concerns that impact morale, especially if employees encounter cash flow problems.

Artificial Intelligence

Artificial Intelligence (AI) is a prevalent component of everyday business, transforming how small and mid-sized companies manage their operations and workforce. AI is in the automation of payroll, tax filing, and compliance, as well as drives efficiency in recruiting while providing HR personnel predictive insights that improve retention. Employers benefit from gaining instant access to data regarding pay, benefits, and even performance reviews via mobile devices or even voice assistants.

However, for all the good employers can tap into regarding AI, the ability to regulate it is outpaced by the development of technology itself. As we head toward the new year, the federal government in recent years has approached AI mostly through agency-specific actions (e.g., the Federal Communications Commission has a regulation in place to prevent the use of AI-generated voices in robocalls) and executive orders that have focused on security and responsible development.

What limited movement there is at the federal level around legislating AI currently centers around an attempt to ban states from doing so. Some leaders in the House of Representatives proposed a possible amendment in an unrelated bill that would have pre-empt states’ own efforts to regulate AI for 10 years. That met significant challenge and was removed from a bill.

On Dec. 11, the president signed an executive order that requires his administration (primarily the Department of Justice) to create infrastructure that allows the federal government to pre-empt AI laws at the state level, essentially limiting states from regulating AI under certain circumstances. The DOJ would be allowed to use its judgment on the constitutionality of state laws related to AI, pursue litigation against those states, and cut specific funding if it deems laws too restrictive.

At the present time, states continue to lead the charge in AI legislation, most notably around the following topics:

• Making illegal the use of deepfakes (images, videos, and voice content) involving political figures. At least 40 states have laws on the books on this topic.
• Requiring the use of disclaimers when AI is used.
• Protecting the safety of children.
• Extending existing privacy laws.
• Use of AI in automated decision-making (e.g., AI makes decisions on employment or performance evaluation without human guidance).

States such as California, Colorado, Illinois, Maine, Texas, and Utah have AI-specific laws, while at least 22 states have pending legislation. This executive order might impact many of the AI laws that states put in place to provide protections for its citizens. The most significant movement to date on the subject is amendments to the California Consumer Privacy Act (CCPA) that introduce requirements on automated decision-making technologies and AI. These regulations go into effect Jan. 1, 2026. The law states that employers subject to the CCPA that use automated decision-making technology related to employment without meaningful human involvement must:

• Conduct detailed risk assessments
• Provide pre-use notices
• Honor certain opt-out rights

How To Mitigate the Impact of Regulatory Changes

Running a business comes with challenges: some predictable and some that arise from circumstances out of one’s control. Compliance requirements that accompany legislative and regulatory action at the federal, state, and local level are not always on the radar. There are strategies an employer can implement to help their business stay ahead of the curve.

• Consult with legal and financial advisors
• Use technology that tracks regulatory issues
• Upgrade technology on payroll processing, recruiting, and hiring
• Train staff to on new technology, including AI
• Work with an HR service provider

Staying on top of an ever-changing regulatory landscape and staying compliant could require a combination of some or all these approaches.