Top legislative payroll updates to watch in 2025

As we move into 2025, payroll professionals and business owners alike need to stay informed about several key legislative changes that could impact payroll processes. Understanding these will help ensure smooth operations in the new year. Here’s a look at the top legislative payroll updates to watch in 2025.

Tax Cuts and Jobs Act (TCJA) sunset

The Tax Cuts and Jobs Act, put in place in 2017, is set to expire at the end of 2025. This means that provisions like the suspension of the relocation expense deduction and the bicycle commuter benefit could be subject to change.

Currently, under the TCJA, relocation expenses are no longer deductible by employees, and the bicycle commuter benefit, which was once a tax-free benefit, is now taxable. As the expiration date approaches, payroll departments should be prepared for potential legislative adjustments. 

There’s speculation that the upcoming, new administration may push for adjustments, either extending these provisions or reinstating previous deductions. It’s key to stay updated as Congress and the new administration make decisions in 2025 regarding the future of these tax policies.

FUTA credit reductions

Employers in California and New York should brace for higher Federal Unemployment Tax Act (FUTA) tax rates in 2025. These states have outstanding federal loans and, as of November 2024, have not yet repaid them. If these loans remain unpaid by November 10, 2025, employers in these states will face a 1.5% FUTA tax rate instead of the standard 0.9%.

For employers in these states, it’s essential to anticipate this increase and budget accordingly. Payroll systems can automatically calculate these liabilities, but if your system doesn’t, you should factor in the potential extra cost. If the states repay their loans before the deadline, employers will receive a refund for the additional tax paid. However, planning for this in advance will prevent any surprises at the end of the year.

Social Security wage base increase

In 2025, the Social Security wage base will increase to $176,100, up from $168,600 in 2024. This means that employees earning more than this amount will not have Social Security taxes withheld beyond this threshold. Employers need to be prepared for this adjustment and ensure that payroll systems are updated accordingly.

Additionally, the Medicare wage base will restart at the beginning of the year, with the Additional Medicare Tax kicking in for employees earning over $200,000. This tax only applies to the employee portion, not the employer’s contribution, so it’s important to account for these changes in your payroll processing.

Retirement and HSAs contribution limits

Contribution limits for retirement plans and health savings accounts (HSAs) will see increases in 2025:

• 401(k), 403(b), and 457 plans: Rises to $23,500, with an additional $7,500 catch-up contribution for employees aged 50 and over.

• HSAs: Increase to $4,300 for individuals with single coverage, while families will be able to contribute up to $8,550.

• Flexible spending accounts (FSAs): Healthcare FSAs will raise to $3,300, while the limit will remain at $5,000 for Dependent Care FSAs.

Employers offering these benefits should update their systems to reflect these new contribution limits, as employees may look to maximize their savings in the new year.

Restart of taxable wage limits

Each year, as the calendar year begins, all wage bases for FUTA, SUTA (State Unemployment Tax Act), and Social Security taxes reset. This can sometimes catch employers off guard, so it’s a good idea to proactively address this in January and February to avoid confusion. It’s also important to note that some states have varying limits for SUTA, so businesses operating in multiple states should ensure their payroll processes are equipped to handle these variations. 

2025 will bring a variety of legislative adjustments that will impact payroll processes, and employers need to stay ahead of these updates. By proactively adjusting payroll systems and budgeting for tax increases, businesses can avoid surprises and certify compliance with the latest legislation. Staying informed and prepared is the key to managing payroll effectively for the coming year.