Payroll compliance can be both complex and costly if you miss important details. Unless you put consistent payroll processes in place, you leave your business vulnerable to lawsuits. With that in mind, make sure you’re properly applying pay policies, calculating Fair Labor Standards Act (FLSA) overtime, and following FMLA and other leave policies. You can also protect your business by staying up to date on compliance changes.
Important 2025 Payroll Compliance Updates
2025 will usher in changes to quite a few federal payroll policies:
- The Social Security taxable base wage is increasing to $176,100.
- Standard deductions for IRS federal income taxes in 2025 have increased to $30,000 for married couples filing jointly; $15,000 for single filings or married filing separately; $22,500 for a head of household.
- Limits for qualified fringe benefits for tax year 2025 are $325 for parking; $325 for commuter highway vehicle and transit pass (combined); $17,280 for adoption assistance.
- Qualified retirement contribution limits have also been updated. Elective deferral limits for 401(k), 403(b) and 457 plans increase to $23,500; annual IRA contribution limit remains at $7,000; the annual compensation limit increases to $350,000 for 401(k), 403(b), SEP and profit-sharing plans; the limit for defined benefit plans increases to $280,000; contribution limits for SIMPLE plans increase to $16,500, while the catch-up limit remains at $3,500.
- The latest HSA contribution limits are $4,300 (self-only), $8,550 (family), and the catch-up contribution limit (age 55 or older) stays at $1,000.
- FSA limits increase to $3,300. The carryover limit for cafeteria plans increases to $660. Dependent Care FSA will stay the same at $2,500 for those married filing separately and $5,000 for those who are single or married filing jointly.
- The new federal overtime law for 2025, which goes into effect on January 1, 2025, increases the salary threshold for overtime pay to $58,656 annually, or $1,128 per week.
Changes to State Laws in 2025
Many states have also made important updates that will affect payroll:
- Beginning in 2025, Assembly Bill 2123 will remove the requirement for employees to use accrued vacation time before accessing Paid Family Leave benefits in California.
- Washington’s Paid Family and Medical Leave total premium rate will increase to 0.92% of wages up to the Social Security cap of $176,100. Employers pay 28.48% of the total premium, and employees pay the remaining 71.52%.
- Contributions to the New York Paid Family Leave program are increasing to 0.388% of an employee’s gross wages up to a maximum annual contribution of $354.53.
- On July 1, 2025, payroll deductions begin for Maryland’s Family and Medical Insurance, launching July 1, 2026. Employers will remit the first payment to the state in October 2025.
- The Michigan Paid Medical Leave Act goes into effect on Feb. 20, 2025, requiring employers with 50+ employees to grant eligible employees a minimum of 40 paid medical leave hours each benefit year.
- While Maine Paid and Family Medical Leave goes into effect in 2026, payroll withholdings for the program will begin on January 1, 2025, and be transferred to the Maine Paid Family and Medical Leave Fund.
- Delaware Paid and Family Medical Leave goes into effect in 2026, but payroll withholdings for the program will begin on January 1, 2025.
19 states have increases to their minimum wage effective January 1, 2025, and 3 more will have increases in July and September. For a detailed look at the latest minimum wage regulations where you are, check out Paycor’s Guide to Minimum Wage by State.
Here’s the good news: Paycor clients don’t need to take any action for new rates and caps to be calculated. Instead, we program federal, state, and local withholding changes into Paycor’s system for you, effective January 1. The system updates throughout the year to stay on top of changing regulations.
Illinois, Minnesota, and Vermont have pay transparency laws starting in 2025, which will require employers to list salaries in job postings.
The Cost of Non-Compliance
The federal government continues to enforce workplace rights through lawsuits. In fiscal year 2024, the Equal Employment Opportunity Commission (EEOC) filed 110 lawsuits challenging unlawful employment discrimination.
Wage and hour settlements continue to be a primary compliance exposure for businesses, so HR professionals and executives should focus their efforts on prevention.
Spending money now to help ensure compliance is better than spending even more money down the road in the event of a lawsuit. These are some typical wage and hour mistakes HR professionals should try to avoid.
Exemption Classification Errors
Classification issues can be a big problem for business when dealing with the FLSA. For example, it’s common for employers to improperly classify workers as exempt, and then fail to pay overtime wages. This can lead to penalties and even legal issues.
The most common roles that are excluded from receiving overtime pay are “white-collar exemptions” for executive, administrative, and professional employees. To qualify, the employee must be paid a salary (not hourly), earn minimum annual pay of $58,656 (a significant increase from 2024), and regularly perform certain duties. For example, an executive is required to supervise two or more employees. For all hours worked past 40 in a work week, non-exempt employees must be paid 1.5 times their regular pay rate.
Misclassifying Freelancers and Employees
Here’s another major compliance challenge: correctly classifying employees. Many employers inaccurately classify some employees as independent contractors or interns. In the current gig economy, more and more businesses hire freelancers to reduce payroll costs and tax liabilities. On paper, gig workers have more freedom than employees. Employers can’t legally dictate when, where, or how much they work. But gig workers aren’t entitled to employment benefits such as health insurance or overtime pay.
If you misclassify some employees as independent contractors, and they don’t receive those benefits, your company could be in hot water when it comes to compliance.
On January 10, 2024, the U.S. Department of Labor (DOL) published a final rule, which went into effect March 11, 2024, revising how the distinction between employees and independent contractors is determined under the Fair Labor Standards Act (FLSA). This rule rescinds the 2021 IC rule and introduces an economic reality test based on six factors, aligning with longstanding judicial precedent to help prevent misclassification of workers while providing clarity for businesses. More details on the final rule are available here.
With so much confusion about who’s classified as what, it’s easy to see how slip-ups can happen. It’s important to periodically audit your employee database to make sure everyone is in the right category.
Disregarding Pay Equality
The Equal Pay Act (EPA) dictates that men and women in the same workplace receive equal pay for equal work. The jobs don’t have to be 100% alike, but they do have to be substantially similar. Job content, not title, is the determining factor to test for job equality. The EPA covers all forms of compensation, not just salary: overtime, bonuses, benefits packages, stock options, vacation pay, and reimbursement for travel expenses. If a wage inequality between men and women is discovered, you cannot reduce the wages of either party to equalize pay.
Workers’ Compensation Insurance
Every state, as well as the federal government, has a workers’ compensation program for employees who are injured on the job. The laws vary from state to state, and updates occur on different timelines. It’s important to track these changes closely, especially if you have offices in more than one state. Businesses face several common compliance challenges:
- Not filing or accurately completing forms
- Failure to pay benefits to injured or ill employees in a timely fashion
- Inaccurate benefit amounts
Since workers’ compensation is state-specific, penalties may vary. Implementing measures to prevent compensation fraud is crucial, as typically, these issues will result in a fine.
The Role of HR
Companies can mitigate the chances of lawsuits by:
- Having an accurate, automated time tracking system
- Maintaining accurate employee pay records
- Training managers on the differences between non-exempt and exempt employees
- Conducting periodic audits to make sure all workers are classified correctly
Most lawsuits stem from inaccurate record-keeping. If your data is incomplete or hard to understand, your company is more vulnerable to class-action wage and hour lawsuits. These cases damage both your bottom line and your reputation. Having solid payroll practices in place along with an online payroll software will go a long way toward compliance.
Sound Overwhelming? Paycor Can Help
You certainly don’t want to put your business at risk of litigation due to compliance errors. Paycor can help. With accurate timekeeping, payroll and tax updates, proactive compliance warnings to ensure proper tax setup, consistent recordkeeping, and detailed reports, our HCM technology helps you confidently manage compliance. We’ve got more than 30,000 customers and more than 30 years’ experience helping business leaders like you. Take a free guided product tour to learn more.
