Navigating Payroll Compliance: A Crucial Necessity for Businesses Ensuring payroll compliance can often present challenges, but neglecting this essential area can be both complicated and financially burdensome. Without consistent and thorough payroll processes, your organization may face vulnerability to potential litigation.
It’s vital to rigorously apply pay policies, accurately calculate Fair Labor Standards Act (FLSA) overtime, and adhere to the Family and Medical Leave Act (FMLA) alongside other relevant leave policies. Moreover, staying informed about ongoing changes in compliance regulations will further safeguard your business.
Key Payroll Compliance Updates for 2025 As we approach 2025, various federal payroll policies are set to change significantly:
1. Social Security Taxable Base Wage: The taxable wage base for Social Security will rise to $176,100.
2. Standard Deductions for IRS Federal Income Taxes: Married couples filing jointly: $30,000 – Single filers or married individuals filing separately: $15,000 Head of household: $22,500
3. Qualified Fringe Benefits Limits for 2025 are as follows: Parking: $325 – Combined commuter highway vehicle and transit pass: $325 – Adoption assistance: $17,280
4. Retirement Contribution Limits have been updated: Elective deferrals for 401(k), 403(b), and 457 plans will increase to $23,500. The IRA annual contribution limit will remain at $7,000. The annual compensation limit grows to $350,000 for 401(k), 403(b), SEP, and profit-sharing plans. The defined benefit plan limit will adjust to $280,000. Simple plan contribution limits will rise to $16,500, with a catch-up limit still at $3,500.
5. Health Savings Account (HSA) Contribution Limits are now $4,300 for individual coverage and $8,550 for family coverage, with the catch-up contribution (for those aged 55+) remaining at $1,000.
6. Flexible Spending Account (FSA) Limits have increased to $3,300. The carryover limit for cafeteria plans rises to $660. However, the Dependent Care FSA contribution limits remain unchanged at $2,500 for married couples filing separately, and $5,000 for single filers or married couples filing jointly.
7. The newly established federal overtime law, effective January 1, 2025, will raise the salary threshold for overtime pay to $58,656 annually, equating to $1,128 per week. State Law Modifications in 2025 In addition to federal changes, numerous states are also enacting significant payroll related updates:
In California, Assembly Bill 2123 will eliminate the requirement for employees to exhaust accrued vacation time before accessing Paid Family Leave benefits starting in 2025.
Washington will see an increase in the “Paid Family and Medical Leave” total premium rate to 0.92% of wages, applicable up to the Social Security cap of $176,100. Employers will cover 28.48% of this total premium,
while employees will pay the remaining 71.52%. In New York, contributions to the “Paid Family Leave program” will rise to 0.388% of gross wages, capping annual contributions at $354.53.
Starting July 1, 2025, payroll deductions will commence for “Maryland’s Family and Medical Insurance”, which will launch in July 2026, with the first employer payment due in October 2025.
The Michigan Paid Medical Leave Act will come into effect on February 20, 2025, mandating employers with 50 or more employees to provide at least 40 hours of paid medical leave annually to eligible employees.
Although Maine Paid and Family Medical Leave won’t be effective until 2026, payroll deductions for the program will start on January 1, 2025.
Similarly, Delaware’s paid and family medical leave will begin implementing payroll withholdings in 2025, ahead of its 2026 mandatory rollout.
Additionally, 19 states will experience an increase in their minimum wage effective January 1, 2025, with three more states set to follow with increases in July and September. For detailed insights into the current minimum wage rates by state, check the consolidated Minimum Wage Table
Furthermore, Illinois, Minnesota, and Vermont will introduce pay transparency laws in 2025 that require employers to disclose salary information in job postings. The Consequences of Non-Compliance The importance of adhering to workplace regulations cannot be overstated.
The federal government remains vigilant in upholding workplace rights, as evidenced by the Equal Employment Opportunity Commission (EEOC), which filed 110 lawsuits in fiscal year 2024 targeting unlawful employment discrimination.
For businesses, wage and hour settlements remain a primary compliance risk, thus emphasizing the need for proactive measures from HR professionals and executives. Common Wage and Hour Mistakes for HR Professionals to Avoid Human Resources (HR) professionals play a crucial role in ensuring compliance with labor laws, specifically regarding wages and hours. However, several common pitfalls can jeopardize a company’s legal standing and financial health. Here are some key errors to steer clear of: Exemption Classification Errors Misclassification can pose significant challenges for businesses under the Fair Labor Standards Act (FLSA). A frequent issue is the incorrect designation of employees as exempt from receiving overtime pay. Such misclassifications can result in costly fines and legal disputes.
Typically, the “white-collar exemptions” apply to executive, administrative, and professional employees. To qualify as exempt, an employee must be salaried, earn a minimum annual income of $58,656 (an increase expected in 2024), and meet specific duty requirements—for instance, executives are responsible for supervising at least two employees. Non-exempt employees are entitled to receive 1.5 times their regular wage for any hours worked beyond 40 in a week.
Misclassifying Freelancers and Employees Another significant compliance challenge lies in correctly categorizing workers. Many employers mistakenly label individuals as independent contractors or interns. In today’s gig economy, numerous businesses opt for freelance hires to minimize payroll expenses and tax obligations. While gig workers enjoy more flexibility in terms of work hours and methods, they do not qualify for benefits like health insurance or overtime compensation. If workers are misclassified, this can lead to compliance violations, exposing your company to penalties.
As of January 10, 2024, the U.S. Department of Labor (DOL) implemented a new rule that became effective on March 11, 2024. This rule revises the criteria for distinguishing between employees and independent contractors using an economic reality test based on six factors. For a detailed overview of this final rule, please visit the DOL website. Due to the nuances of classification, periodic audits of your employee database are vital to ensure accurate categorizations.
Disregarding Pay Equality The Equal Pay Act (EPA) mandates that employees of different genders performing similar jobs must receive equal remuneration. Although job roles do not need to be identical, they should be substantially similar based on job content rather than titles. The EPA encompasses all compensation forms, including overtime, bonuses, benefits packages, stock options, and travel reimbursements. If you identify a wage disparity, you cannot remedy this by lowering one party’s salary to achieve equality.
Neglecting Workers’ Compensation Insurance Every state, along with the federal government, maintains a workers’ compensation program to support employees injured on the job. Since laws and updates fluctuate across states, it is critical to monitor these changes closely, especially for businesses operating in multiple locations.
Common compliance challenges include: Failing to accurately complete or file necessary forms, Delaying the payment of benefits to injured employees, Incorrect benefit calculations Given the state, specific nature of workers’ compensation, penalties for non-compliance can vary significantly. Implementing robust measures to combat compensation fraud is essential, as violations often lead to fines.
The Role of HR departments can substantially reduce the risk of legal repercussions by: Utilizing an accurate, automated time tracking system, Keeping detailed records of employee pay, Educating managers on the distinctions between exempt and non-exempt employees, Regularly auditing classification of all workers Most litigation arises from inadequate record-keeping;
incomplete or unclear data increases vulnerability to wage and hour lawsuits that can harm both financial standing and corporate reputation. Establishing effective payroll practices, possibly in combination with online payroll solutions, enhances compliance.
