What happened: Congress passed the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. It's the biggest startup tax break in years.
Why you should care:
- You can now deduct R&D expenses immediately instead of spreading them over 5 years. If you're pre-revenue and burning cash on product development, this eliminates phantom tax bills.
- QSBS gains exclusion jumped from $10M to $15M. More tax-free money at exit.
- 1099 threshold tripled from $600 to $2,000. Fewer forms for small contractor payments.
What didn't change:
- Multi-state payroll is still a mess. No federal fix for remote worker taxation.
- Contractor classification rules are exactly the same. No new safe harbors.
What you need to do by January 1, 2026: Update your payroll system's withholding tables and set up new W-2 tracking codes.
Quick Summary
Wins for Startups:
- Immediate R&D expense deductions restored (permanent, no sunset)
- QSBS exclusion cap increased 50% to $15 million
- Tiered QSBS holding periods: get partial exclusions at 3 or 4 years instead of all-or-nothing at 5
- 1099 reporting threshold raised from $600 to $2,000
- 1099-K threshold restored to $20,000 + 200 transactions (goodbye $600 chaos)
- 100% bonus depreciation brought back
- R&D payroll tax credit still available (up to $500K/year for qualifying startups)
Still Broken:
- Multi-state remote work taxation: still a patchwork, state-by-state nightmare
- Contractor classification: no federal safe harbor, same IRS tests apply
- "Convenience of employer" states still create double-taxation headaches
Critical Deadlines:
- January 1, 2026: New federal withholding tables must be live
- July 4, 2026: Last day to amend 2022-2024 returns for retroactive R&D expensing
- Stay ahead of all 2026 compliance deadlines with our 2026 Compliance Calendar
| What Changed | 2025 Rule | 2026 Rule | Why It Matters |
|---|---|---|---|
| R&D Expensing | 5-year amortization | Immediate deduction | Eliminates artificial tax liability for pre-revenue startups |
| QSBS Exclusion Cap | 5 years (all or nothing) | Tiered: 50% at 3yr, 75% at 4yr, 100% at 5yr | Flexibility for earlier liquidity events |
| 1099 Reporting Threshold | $600 | $2,000 | Fewer forms for small contractor payments |
| 1099-K Threshold | $600 (planned) | $20,000 + 200 transactions | Major relief for gig/platform payments |
| Bonus Depreciation | 40% (phasing down) | 100% restored | Full write-off for equipment purchases |
R&D Expensing Is the Biggest Win
The restoration of immediate R&D expensing under Section 174A reverses one of the most painful provisions from the 2017 tax law. Since 2022, startups were forced to capitalize and amortize domestic R&D expenses over five years. This created phantom tax bills even for pre-revenue companies burning cash on product development.
Starting with tax year 2025:
- Domestic R&D expenditures (including software development) can be immediately deducted in the year incurred
- The provision is permanent with no sunset
- You can alternatively elect to capitalize over 60+ months if that works better for your situation
- Foreign R&D remains subject to 15-year amortization
Retroactive relief for small businesses: If your company meets the Section 448(c) gross receipts test (average annual gross receipts of $31 million or less over the prior three years), you can amend 2022-2024 returns to recover previously capitalized R&D costs. The deadline is July 4, 2026.
R&D payroll tax credit still works: Startups with less than $5 million in gross receipts and no more than five years of gross receipts history can apply up to $500,000 annually against payroll taxes ($250,000 against employer Social Security tax and $250,000 against Medicare tax). This is valuable for pre-revenue startups without income tax liability.
QSBS Gets More Founder-Friendly
For stock issued after July 4, 2025:
- Exclusion cap increases from $10M to $15M (or 10x basis, whichever is greater), indexed for inflation starting 2027
- Gross asset threshold rises from $50M to $75M, also inflation-indexed
- New tiered holding periods allow partial exclusions for earlier exits:
- 50% exclusion after 3 years
- 75% after 4 years
- 100% after 5 years
The tiered structure creates new strategic options. Previously, selling QSBS before five years meant forfeiting the exclusion entirely (unless rolling into replacement QSBS under Section 1045). Now, a founder selling after four years captures 75% of the exclusion benefit.
State warning: California, Alabama, Mississippi, New Jersey, and Pennsylvania do not recognize the QSBS exclusion at the state level. Founders in these states face full state capital gains taxation regardless of QSBS status. Massachusetts and Hawaii provide partial conformity.
1099 Reporting Gets Simpler, But New Tracking Requirements Emerge
The OBBBA raises the 1099-NEC and 1099-MISC reporting threshold from $600 to $2,000, effective for payments made after December 31, 2025. This threshold will be inflation-indexed starting 2027. If you're working with numerous small contractors (freelance designers, consultants on project work), this meaningfully reduces paperwork.
The Form 1099-K threshold for third-party payment networks (PayPal, Venmo, Square) has been restored to $20,000 AND more than 200 transactions, retroactive to 2022. This reverses the planned $600 threshold that created reporting chaos.
New reporting requirements for 2026:
- Qualified tips must be separately identified with a Treasury Tipped Occupation Code (TTOC)
- Qualified overtime compensation (the FLSA premium portion) must be tracked and reported separately
- W-2 forms require new Box 12 codes: TT for overtime and TP for tips
IRS Notice 2025-62 provides penalty relief for tax year 2025 filings, treating it as a transition year. Full compliance is mandatory starting with 2026 tax year reporting.
Nothing Changed on Contractor Classification
The OBBBA contains no provisions modifying independent contractor versus employee classification. The existing framework stays intact:
- IRS behavioral, financial, and relationship factors test continues to apply
- Section 530 safe harbor from the Revenue Act of 1978 still provides relief for employers with reasonable basis for contractor treatment, consistent classification, and proper 1099 filing
- The DOL's independent contractor rule remains the operative standard for FLSA purposes
Misclassification penalties remain unchanged. The Trust Fund Recovery Penalty allows the IRS to hold responsible persons personally liable for 100% of unpaid employment taxes. Per-form penalties under IRC Sections 6721 and 6722 reach $330 per return for intentional failures.
Key Effective Dates: Two-Phase Transition
Phase 1: Retroactive to 2025 (apply when filing 2025 returns in early 2026)
- Domestic R&D immediate expensing (Section 174A)
- 100% bonus depreciation for property placed in service after January 19, 2025
- EBITDA-based business interest limitation (Section 163(j))
- Tips deduction up to $25,000 (for qualifying occupations, phases out at $150K/$300K MAGI)
- Overtime deduction up to $12,500 (W-2 employees only)
Phase 2: Takes Effect in 2026
- New federal withholding tables (implement January 1, 2026)
- $2,000 threshold for 1099-NEC/MISC reporting
- Mandatory W-2 codes for tips and overtime (Box 12 codes TT, TP)
- Standard deduction: $16,100 single / $32,200 joint
- SALT cap increases to $40,400 (from $40,000)
- Estate tax exemption: $15 million
The distinction matters for payroll system updates. Withholding table changes and W-2 code configuration must be completed before January 1, 2026. The 2025 tax benefits can be claimed retroactively when filing 2025 returns.
Multi-State Payroll Complexity Remains Unchanged
The OBBBA does not create any federal standard for remote worker taxation. Startups with distributed teams continue navigating a patchwork of state rules.
General rule: Withhold income tax for the state where the employee physically performs work, not where the employer is headquartered.
Convenience of employer states (may source income back to employer's state): New York, Pennsylvania, Nebraska, Delaware, and partially New Jersey. Remote employees in these situations may face double taxation requiring credits.
Nexus warning: A single remote employee can create employer nexus in their state, requiring state employer registration, income tax withholding, state unemployment insurance payments, and potentially corporate income tax filing.
State Conformity to OBBBA Provisions
| Conformity Type | States |
|---|---|
| Rolling conformity (auto-adopt) | Colorado, Connecticut, Illinois, Massachusetts, New Jersey, New York |
| Static conformity (require legislative action) | California (frozen at January 1, 2024), Florida, North Carolina |
| Decoupled (explicitly rejected OBBBA provisions) | Rhode Island (all provisions), Michigan and Pennsylvania (R&D/depreciation provisions), Delaware (Sections 168(k), 168(n)) |
Model state tax implications before hiring in new states, particularly for R&D expensing and bonus depreciation benefits that may not carry through to state returns.
Q1 2026 Action Checklist
Immediate payroll actions
- Update federal withholding tables per 2026 Publication 15-T before January 1
- Configure payroll systems to track FLSA overtime premium separately from regular overtime
- Set up new W-2 Box 12 codes (TT, TP) for 2026 reporting
Tax planning actions
- Evaluate retroactive R&D expense recovery if you meet the $31 million gross receipts threshold (deadline: July 4, 2026)
- Review QSBS eligibility for any planned equity grants; new enhanced benefits apply to stock issued after July 4, 2025
- Model Section 179 deduction optimization with the increased $2.5 million cap
- Audit contractor payments to identify those below the new $2,000 threshold
Multi-state compliance
- Document where each remote employee physically works
- Verify employer registration in every state with employees
- Require employees to provide advance notice before relocating
- Monitor state legislative sessions for conformity decisions in early 2026
Bottom Line
The OBBBA delivers real tax simplification for startups. Immediate R&D expensing and enhanced QSBS provisions are the biggest wins. The raised 1099 threshold and elimination of the $600 1099-K rule reduce compliance friction for companies working with contractors.
If you're hoping for contractor classification clarity or multi-state payroll simplification, there's nothing here for you. Those challenges persist unchanged.
Your key priority: Make sure payroll systems are updated for January 1, 2026, then take advantage of retroactive 2025 benefits when filing returns this spring.
How Warp Takes This Off Your Plate
Reading through all of this, you might be thinking: "Great, more compliance homework." That's exactly the problem Warp solves.
Warp is the only AI-native HR & Payroll platform built for startups. Instead of clicking through clunky dashboards or .gov websites for taxes, Warp's AI agents open every state tax account, file every payroll form, and resolve every tax notice automatically.
Here's how Warp handles the 2026 changes for you:
Withholding table updates? Already done. Warp automatically updates to the 2026 federal withholding tables on January 1. You don't touch a thing.
New W-2 Box 12 codes (TT, TP)? Warp tracks overtime and tip data throughout the year and populates the new codes automatically at tax time. No manual configuration required.
1099 threshold changes? Warp manages your contractor payments and only generates 1099s when you cross the new $2,000 threshold. Less paperwork, zero guesswork.
Multi-state payroll complexity? This is where Warp really shines. When you hire someone in a new state, Warp automatically registers your company with that state's tax agencies, sets up withholding, and handles ongoing filings. You never visit a government website or figure out which forms to file.
State conformity confusion? Warp's team stays on top of which states adopt OBBBA provisions and which don't, so your state filings are accurate regardless of whether California decides to conform or stay frozen at 2024 rules.
Every Warp customer gets a dedicated Account Manager and Benefits Advisor included to guide them through payroll setup, multi-state expansion, and benefits selection. So when you have questions about how the OBBBA affects your specific situation, you're not Googling or sitting on hold with a tax agency. You're talking to a real person who knows your company.
With Warp, you'll never visit a government website, negotiate with tax agencies, or pay accountants $150 per filing. Just focus on building your business while Warp handles payroll, compliance, and benefits for your team across any state.
tldr.: The OBBBA brings real tax benefits for startups, but it also adds new tracking requirements and leaves multi-state complexity untouched. Warp handles all of it so you can spend your time on product, not payroll.
