Payroll Changes for 2025: What to Expect

As we step into 2025, various adjustments to payroll regulations will take effect, impacting both employers and employees. These changes come with the goal of adapting to inflation, rising living costs, and evolving workforce dynamics. Among the key updates for payroll are the increases to 401(k) contribution limits, FICA tax rates, and HSA contributions. Here's a breakdown of what’s new for payroll in 2025:

1. 401(k) Contribution Limits Increase

One of the most significant updates for 2025 involves the increase in the contribution limits for 401(k) retirement accounts. To help individuals save more for retirement, the IRS has raised the maximum contribution limits across the board. For 2025:

• Employee Contribution Limit: The contribution limit for employees who participate in a 401(k) plan will increase from $23,000 in 2024 to $23,500 in 2025. This boost allows workers to save more of their income tax-deferred.
• Catch-Up Contribution Limit: Employees aged 50 and older will continue to enjoy catch-up contributions. The catch-up limit remains $7,500 in 2025. This means older workers can contribute up to $31,000 (employee limit plus catch-up contribution). For 2025, higher catch-up contributions limit (Age 60-63) is $11,250 instead of $7,500
• Employer Contribution: The combined employee and employer contribution limit for 2025 will reach $70,000. These increases allow for larger retirement savings, helping employees prepare for their futures with more robust financial options.

These increases reflect ongoing efforts to help people save more for retirement amid inflation and the rising costs of living.

2. FICA Increase

In 2025, employees and employers will notice an increase in the FICA (Federal Insurance Contributions Act) . FICA taxes fund Social Security and Medicare programs, and the rate adjustment is part of efforts to sustain these critical social programs as the U.S. population ages.

• Social Security Tax Rate: The Social Security tax rate remains set at 6.2% for employees and employers each. However, the Social Security wage base limit — the maximum income subject to Social Security tax — will increase from $168,600 in 2024 to $176,100 in 2025. This increase allows a higher portion of higher wages to be taxed.
• Medicare Tax Rate: The Medicare tax rate will remain at 1.45% for employees and employers. Additionally, the 0.9% additional Medicare tax for high earners remains in place. This surcharge applies to income above $200,000 for individuals.

While the increase in Social Security wages limit means higher contributions for some employees, the tax rate changes themselves are relatively moderate, ensuring continued funding for these programs.

3. HSA Contribution Limits Increase

Health Savings Accounts (HSAs) are a popular benefit for employees looking to manage their healthcare expenses while enjoying tax advantages. In 2025, the contribution limits for HSAs will increase, providing individuals with more flexibility to save for medical costs.

• Individual Coverage: The HSA contribution limit for individuals with self-only coverage will rise to $4,300 in 2025, up from $4,150 in 2024.
• Family Coverage: The family coverage HSA contribution limit will increase to $8,550 in 2025, up from $8,300 in 2024.
• Catch-Up Contributions: For those 55 or older, catch-up contributions remain available. These contributions will stay at $1,000, allowing older employees to set aside more for healthcare needs.

These changes encourage more savings for healthcare expenses, which is especially crucial given the increasing cost of medical care in the U.S.

4. Other Payroll Considerations in 2025

Beyond the notable changes to 401(k) contributions, FICA taxes, and HSAs, there are a few other payroll considerations for 2025 :

• DOL Overtime Rule no longer take effect: Due to a Federal court ruling in Texas, the salary threshold has reverted back to the lower level of $684 per week. This means any employees earning less than this threshold must be paid overtime for hours worked over 40 in a workweek. Also the increase in salary threshold proposed by the DOL in 2024, will not take effect.
• Taxable Wage Base Increase: in 2025, the taxable wage base for Kentucky unemployment will increase from $11,400 to $11,700.
• Updated minimum wage: As of January 1, 2025, there are 40 states updated their minimum wage rate. Overall, there has been an ongoing movement to get the federal minimum wage to $15 an hour taking inflation into consideration.

Conclusion

The payroll changes in 2025 are designed to offer greater savings opportunities for employees while ensuring the sustainability of important social programs like Social Security and Medicare. As employers and employees navigate these changes, it's crucial to stay informed about updated contribution limits for retirement accounts and HSAs and any tax rate shifts. With careful planning and consideration, these adjustments can provide workers with more financial flexibility and support in 2025.

This article was written by Gwen Le. Gwen is a Payroll Specialist I with Baldwin CPAs. For more information on the support Baldwin CPAs can provide you, contact gwen.le@baldwincpas.com.