Payroll compliance is critically important for businesses of all types, and as we navigate 2025, understanding and adhering to payroll laws is more important than ever. This blog discusses the intricacies of payroll compliance especially for growing businesses, highlighting recent changes to the regulatory landscape and offering thoughts on how technology can help play a pivotal role.
Common Payroll Compliance Challenges
Payroll compliance involves adhering to various federal, state, and local laws governing employee compensation, tax withholdings, and record-keeping. Navigating the complexity of payroll regulations requires diligence and an internal mechanism for tracking regulatory updates. For growing businesses, maintaining compliance is critical to avoiding liability and penalties, ensuring employee satisfaction, and fostering a trustworthy business environment.
Maintaining records is key. Businesses must ensure accurate and comprehensive documentation of payroll activities, and many laws regulate specific record-keeping requirements related to wages and hours worked. Additionally, proper employee classification is essential to distinguishing between the various types of employees or contractors as each classification may be subject to different tax treatment and benefits.
Compliance is a continuous process that demands careful attention, including regular audits of your payroll policies and procedures.
Key Payroll Compliance Changes in 2025
In recent months, federal, state, and local legislatures and agencies have adopted new measures imposing new payroll obligations on employers. Here are a few high-level payroll developments from 2024 and the first few months of 2025:
Pay Transparency Laws: Many new or expanded pay transparency laws have been adopted over the last year. Under certain state laws, employers are now required to disclose compensation ranges in job postings, and in some instances, a general description of health and retirement benefits.
Minimum Wage Laws: Many states and cities update their minimum wage laws and rates annually, though they are subject to change at any time. It is important to stay updated on the latest rates and regulations.
Paid Family and Medical Leave Laws: In the absence of a federal Paid Family and Medical Leave law, many states have implemented their own PFML laws. State-mandated paid family and medical leave laws may require payroll deductions.
Paid Sick Leave Laws: Many states and cities have mandated paid sick leave laws. Paid sick leave is a benefit that allows employees to take time off from work while still receiving their regular pay when they are ill or need to care for a sick family member. This is not the same benefit as Paid Family and Medical Leave. Some states require employers to provide employees with notice of changing paid sick leave laws.
Payroll Tax: Likewise, payroll tax changes are frequent, such as changes to the Social Security wage base, fringe benefit limits, and retirement contribution limits. Examples include:
- Taxable base wage for Social Security: Increased to $176,100 for the 2025 tax year.
- Qualified Fringe Benefits: Updated limits include $325 for parking, $325 for commuter highway vehicle and transit pass, and $17,280 for adoption assistance.
- Retirement Contribution Limits: Elective deferral limits for 401(k), 403(b), and 457 plans have increased to $23,500. Changes to the SECURE 2.0 Act of 2022 require catch-up contributions by eligible high earners to be made as Roth contributions.
- Contribution limit on a health flexible spending arrangement (FSA): Employees can now contribute up to $3,300 through salary reductions.
Overtime Rules and Fair Labor Standards Act Compliance: The salary threshold for certain white-collar exempt employees (i.e., those who primarily perform executive, administrative, or professional duties) was scheduled to increase to $58,656 per year, expanding overtime protections under the Fair Labor Standards Act. Lawsuits regarding the increase are currently pending. As of the date of this blog, the salary threshold for overtime pay remains at $35,568 per year, which means employees earning less than that per year are generally entitled to overtime pay. State laws may have higher salary thresholds than the federal FLSA for overtime exemptions.
The Role of Technology in Compliance with Payroll Laws
Technology is revolutionizing payroll compliance, offering tools that automate the monitoring and implementation of wage and tax adjustments. With automated rules, HR and workforce management software can help schedule and track time and attendance, calculate wages, streamline tracking of leave and accruals, and automate reporting and forms completion (think ACA, W-4, 1099, W-2, etc.).
Advancements in artificial intelligence (AI) integration are transforming payroll functions by offering tailored features for repetitive tasks to speed up processes. Among other use cases, AI-driven payroll systems can use predictive analytics to auto-populate time entries, forecast payroll expenses, calculate wages owed, check for compliance updates, and highlight areas that may be out of compliance.
Employers using AI and other automated systems in the workplace should deploy appropriate measures around human oversight. Federal and state agencies have emphasized the continued application of statutory protections, irrespective of new tools and systems employers are using.
Strategies for Facilitating Payroll Compliance
To navigate the complex landscape of payroll laws, growing businesses can adopt several strategies:
- Leverage workforce management software to track hours worked and payroll and tax compliance to ensure employees are properly compensated.
- Conduct regular payroll audits to identify and remedy compliance issues.
- Provide ongoing training and education for HR and payroll staff.
- Leverage external resources: Consult with payroll providers for guidance. State and local government agencies typically offer resources and updates for their specific wage laws. Professional legal, tax, and HR consultants can provide personalized advice tailored to your business needs.
Conclusion
As growing businesses navigate the complexities of complying with payroll laws in 2025, staying informed and leveraging technology will be key to success. By understanding new regulations, using advanced payroll systems, and implementing strategic compliance measures, businesses can ensure they remain compliant and competitive.
For more insights and solutions tailored to your payroll needs, explore UKG Ready®, our all-in-one HR, payroll, and workforce management solution, and discover how modern technology can empower your business to thrive in 2025 and beyond.
This content and all the information contained herein is provided for informational purposes only and does not constitute legal, tax, or other professional advice. It should not be used as a substitute for professional advice. All legal, tax, or other questions or concerns should be directed to your legal counsel, tax consultant, or other professional advisors to receive advice tailored to your needs.
