Draft 2027 Publication 15: What Plan Sponsors and TPAs Need to Know Before Year-End
The IRS has posted an early-release draft of Publication 15 (Circular E), Employer’s Tax Guide, for use in 2027, dated October 14, 2026. It is still a draft and may change before it is finalized, and some inflation-adjusted amounts are shown only as placeholders such as “$X,XXX”. Even so, the draft gives employers that sponsor benefit plans, and the third-party administrators and payroll providers that support them, an early look at the rules that will shape payroll and benefits administration next year. These are the items we think matter most.
1. New 2027 Wage Base and Payroll Tax Figures
For 2027, the Social Security wage base under §§ 3121(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”) and 230 of the Social Security Act rises to $192,300, while the 6.2 percent employer and 6.2 percent employee rates under Code §§ 3111(a) and 3101(a) stay the same. The Medicare rate under Code §§ 3101(b)(1) and 3111(b) remains 1.45 percent each for employers and employees, with no wage base limit. Employers must also still withhold the 0.9 percent Additional Medicare Tax (Code §§ 3101(b)(2) and 3102(f)) on wages over $200,000 in a calendar year, and there is no employer share of that tax.
Action item: Prepare to load the new wage base into payroll and benefits systems before the first 2027 payroll. Check calculations that depend on taxable wages, such as nonqualified deferred compensation FICA timing under Code § 3121(v)(2) and Treas. Reg. § 31.3121(v)(2)-1, and 401(k) deferrals, which remain subject to Social Security and Medicare taxes.
2. Trump Account Contribution Programs: A New Benefit to Administer
The draft explains how Trump accounts, which were created by P.L. 119-21 (the One Big Beautiful Bill Act), interact with payroll. A Trump account, governed by new § 530A, is a new type of traditional IRA for a child under age 18, with an annual contribution limit of $5,000. Beginning July 4, 2026, employers may make contributions under new Code § 128 of up to $2,500 a year toward that $5,000 limit. The $2,500 limit applies per employee, not separately for each dependent. Employees may make § 128 contributions through salary reduction under a § 125 cafeteria plan, but only to a dependent’s Trump account.
Two points stand out for plan sponsors and TPAs:
- The income tax exclusion does not carry over to FICA. Contributions within the limits are excluded from gross income and are not subject to income tax withholding. However, all contributions are still subject to both the employer and employee shares of Social Security and Medicare taxes, as well as FUTA. That is different from many cafeteria plan benefits, and payroll setups need to reflect it.
- Amounts over the limit become taxable wages. Contributions above the $2,500 employer limit or the $5,000 total limit generally cannot be excluded and are treated as taxable wages.
The IRS has also moved its guidance on employer contributions from Pub. 15-A to Pub. 15-B, the fringe benefits guide. Separately, Treasury and IRS issued proposed regulations in August 2026, and officials say they are reviewing stakeholder feedback before finalizing them. Sponsors thinking about offering a Trump account program should work closely with cafeteria plan document drafters and payroll vendors on plan amendments, tracking contributions against the limits, and coding for FICA and FUTA.
3. Supplemental Wage and Backup Withholding Rates Are Now Permanent
Because P.L. 119-21 permanently extended the TCJA individual tax rates, the flat supplemental wage withholding rate under Treas. Reg. § 31.3402(g)-1(a)(7) stays at 22 percent, and the mandatory rate is 37 percent on supplemental wages over $1 million in a calendar year. The backup withholding rate under § 3406(a)(1) of the Code stays at 24 percent. When applying the $1 million threshold, employers must include payments from all businesses under common control. This matters for bonus programs, equity vesting, and severance paid across a controlled group. Taxable fringe benefits may also be withheld at the optional 22 percent flat rate.
4. No Tax on Tips and Overtime: New Reporting Duties
For tax years beginning after 2024 and ending before 2029, eligible workers may deduct up to $25,000 of qualified tips under new § 224 of the Code. They may also deduct up to $12,500 of qualified overtime compensation, or $25,000 for married couples filing jointly, under new Code § 225. Qualified overtime is only the premium portion required under section 7 of the FLSA (29 U.S.C. § 207), such as the “half” in time-and-a-half. Employers must:
- honor updated Forms W-4 so employees can reflect these deductions in their withholding;
- continue withholding Social Security and Medicare taxes on tips and overtime; and
- report qualified overtime compensation on information returns under § 6051(a) of the Code and related reporting rules, and report cash tips in Form W-2 box 12 with code “TP” plus Treasury Tipped Occupation Codes in box 14b.
These deductions do not directly change plan compensation definitions. However, the new W-2 reporting fields are a good reason for TPAs to confirm that payroll data feeds still map correctly to each plan’s definition of compensation for deferrals, matching contributions, and testing.
5. Third-Party Payer Arrangements: The Employer Usually Stays on the Hook
Section 16 of the draft is required reading for TPAs and the sponsors that rely on them. An employer that outsources payroll and related tax duties to a third-party payer generally remains responsible for those duties, including liability for the taxes. The governing authorities are Code §§ 3504, 3511, and 7705, and Treas. Reg. §§ 31.3504-1 and 31.3504-2. Liability depends on the type of arrangement:
|
Arrangement |
Who is liable for employment taxes |
|
Payroll service provider (PSP) or reporting agent (Form 8655) |
The employer remains liable; the PSP or reporting agent is not liable |
|
Agent with an approved Form 2678 |
The agent and the employer are jointly liable |
|
Payer designated under section 3504 |
The designated payer and the employer are jointly liable |
|
Certified PEO (CPEO) |
The CPEO is generally treated as the employer for wages it pays, although the customer may also be liable for certain employees |
The IRS strongly recommends that employers keep their own address as the address of record and activate the EFTPS Inquiry PIN they receive so they can confirm the third party is actually making deposits. Under the trust fund recovery penalty of § 6672 of the Code, “responsible persons” can be personally liable for 100% of unpaid trust fund taxes. That group can include officers, accountants, volunteer trustees, and anyone with authority to sign checks.
Action item: Sponsors should review their service agreements with providers, confirm which liability model applies, and set up regular checks of EFTPS deposits.
6. Penalty Changes: Automatic Relief and a New Penalty on Excessive Refund Claims
Starting in July 2026, the IRS’s new Automatic Exemption from Penalty (AEP) program replaces First Time Abate. It automatically relieves failure-to-file, failure-to-pay, and most failure-to-deposit penalties (Code §§ 6651(a)(1), 6651(a)(2), and 6656) for taxpayers with a clean three-year history, or 12 consecutive quarters for quarterly returns. Information returns, including Forms W-2 and 1099, generally are not eligible.
At the same time, P.L. 119-21 expanded the Code § 6676 penalty to employment tax refund or credit claims made after July 4, 2025. An excessive claim can bring a penalty of 20 percent of the overstated amount unless the employer shows reasonable cause. Interest-free adjustments and refund claims remain governed by Code §§ 6205 and 6413 and Treas. Reg. § 31.6205-1 and 31.6413(a)-1. Any Form 941-X correction strategy should be reviewed carefully before filing.
7. Electronic Refunds and Payments
Under Executive Order 14247, the IRS will issue employment tax refunds by direct deposit when valid account information is provided, and refunds may be delayed without it. The order also requires electronic payments to the federal government unless an exception applies. Providers should confirm that client records include current banking information.
8. Reminders for Plan Distributions and Benefit Exclusions
- Federal income tax withheld from distributions from 401(k), 403(b), and governmental 457(b) plans is nonpayroll withholding. It is withheld under Code § 3405, reported on Form 945 (Treas. Reg. § 31.6011(a)-4(b)) and deposited separately from Form 941 payroll withholding.
- Mandatory 20 percent withholding under Code § 3405(c) still applies to eligible rollover distributions that are not direct rollovers.
- HSA contributions made through salary reduction under a § 125 cafeteria plan are not wages under Code §§ 106(d) and 3121(a)(2). HSA contributions made through payroll deduction outside a cafeteria plan are wages subject to employment taxes.
- The information-reporting threshold under Code §§ 6041(a) and 6041A(a) for Forms 1099-MISC and 1099-NEC has increased from $600 to $2,000. That amount will be adjusted for inflation after 2026, and the 2027 figure is not yet published.
- Employment tax records must be kept for at least four years (Treas. Reg. § 31.6001-1(e)(2)).
The Bottom Line
The 2027 draft makes several changes that plan sponsors and TPAs should act on now: a higher wage base, a new Trump account benefit that remains subject to FICA, permanent withholding rates, new tip and overtime reporting, and a stricter penalty for overstated refund claims. It also reinforces long-standing rules on who is liable in third-party payer arrangements. Because the publication is still a draft, sponsors and providers should watch for the final version and for final Trump account regulations before locking in 2027 system changes.
DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.