Navigating 2025 Payroll Tax Changes: How Providers Can Prepare for Compliance

Between reconciling this year’s reports and preparing for next year’s updates, the end of the year is a busy time for payroll tech providers. Navigating the many payroll tax changes can be overwhelming, but in order to remain compliant, it’s critical to be aware of new legislation, tax rate updates, and other compliance-related changes that will come into effect starting on January 1st. 

This guide breaks down some of the major legislative and payroll compliance updates to expect in 2025 and how you can make it through the new year with confidence.

Paid Family and Medical Leave – Delaware, Maine, Maryland

If your customers have employees in Delaware, Maine, or Maryland, these are the high-level updates you need to know for 2025. 

Delaware

Effective Date: 

• Payroll contributions begin on January 1, 2025.
• First PFML contributions are due by April 30, 2025.
• Benefits begin on January 1, 2026.

Update: Delaware is implementing paid leave for the first time in 2025. It will be mandatory for most businesses with 10 or more employees working in the state. 

What’s notable: Delaware requires up to a 0.8% payroll contribution from employers, with an option for employers to withhold up to half of this amount from employees. However, the requirements for both leave and withholding amount varies by employee count. 

Employers with fewer than 10 employees are exempt from providing leave, while those with between 10 and 24 employees must only provide parental leave at 0.32% withholding. If a business employs 25 or more workers, they are required to provide full coverage at the total withholding rate of 0.8%.

Maine

Effective Date: 

• Payroll contributions begin on January 1, 2025.
• First PFML contributions are due by April 30, 2025.
• Benefits begin on May 1, 2026.

Update: Maine is the 13th state to establish a paid family and medical leave program, and benefits. Twelve weeks of paid time off will begin in 2026, with contributions starting January 1, 2025.

What’s notable: Employers are subject to different contribution rates depending on the number of employees they have. Those with 15 or more will contribute 1% of wages, up to the current Social Security wage base, and up to half of the contribution can be deducted from employee wages. Those with 15 or fewer will contribute 0.5% of wages and are able to deduct the entire amount from employee wages.

Maryland

Effective Date: 

• Payroll contributions begin on July 1, 2025
• First PFML contributions are due by October 31, 2025
• Benefits begin on July 1, 2026.

Update: The Maryland Family and Medical Leave Insurance (FAMLI) is a new paid leave program that will be required for all employers who pay a salary or wage to at least one employee working in the state.

What’s notable: The program was initially intended to go live on October 1, 2024, but has been pushed back to July to allow for more time to prepare.

Also notable, as in Maine and Delaware, is the employer contribution rate depends on payroll size. For businesses with 15 or more employees, the rate is 0.90% with the option to withhold up to 0.45% of the amount from employees. For businesses with fewer than 15 employees, the rate is 0.45% with the option to withhold the full amount from employees.

How does this affect payroll tech providers?

It’s crunch time to get your programming updates ironed out, but it’s also essential to be flexible as tax engine vendors and state agencies themselves are determining the final details of these programs.

There’s been a trend of these initiatives taking hold regionally, so if you’re operating in a state close to Delaware, Maine, Maryland, or Minnesota and don’t already have a paid leave program, one may be on the horizon.

Minimum Wage and Paid Sick Leave Ballot Measures – Alaska, Arizona, California, Massachusetts, Missouri, Nebraska

Raising the minimum wage and/or providing paid sick leave was a big focus for ballot measures throughout the country in 2024. Some provisions passed, while others failed. 

This is what you need to know if your customers employ workers in Alaska, Arizona, California, Massachusetts, Missouri, and Nebraska.

Alaska

On the ballot: Raising the state minimum wage to $15 by 2027 and requiring paid sick leave. 

Did it pass: Yes

Effective dates: 

• $13 minimum wage on July 1, 2025.
• $14 minimum wage on July 1, 2026.
• $15 minimum wage on July 1, 2027.

What it means: Each year, starting in 2025, the minimum wage will increase by a dollar until it reaches $15 in 2027, after which it will increase with inflation. The state’s minimum wage will also always be at least $2 over the federal minimum. Employees will also be able to accrue at least 40 hours of paid sick leave per year, with employees of larger businesses able to accrue up to 56 hours.

Arizona

On the ballot: Changing the minimum wage for tipped employees, allowing employers to pay up to 25% less than the state minimum wage if the wage plus tips is at least $2 above the federal minimum wage.  

Did it pass: No

What it means: The minimum wage for tipped workers will rise to $11.70 plus tips, due to a planned increase based on the cost of living.

California

On the ballot: Increasing the state minimum wage to $18 by 2026.  

Did it pass: No

What it means: Minimum wage workers will still receive a 50-cent raise on January 1, making the state minimum wage $16.50. 

Massachusetts

On the ballot: Increasing the state minimum wage for tipped workers.  

Did it pass: No

What it means: Tipped workers will continue to make $6.75 an hour, but their total earnings with tips must reach the state minimum of $15. If they don’t reach $15, the employer covers the difference.

Missouri

On the ballot: Raising the minimum wage to $15 in 2026 and establishing mandatory paid sick leave.

Did it pass: Yes

What it means: Starting on January 1, 2025, the state minimum wage will increase from $12.30 to $13.75, and to $15 in January 2026. Beyond that, the rate will automatically change to reflect inflation. Paid sick leave will now also be required for businesses with 15 or more employees, who will accrue one hour of paid sick leave per 30 hours worked. Employees will be eligible to accrue sick leave on May 1, 2025.

Nebraska

On the ballot: Requiring businesses to offer paid sick leave.

Did it pass: Yes

What it means: Starting October 1, 2025, all private employers must provide paid sick time to eligible employees, regardless of business size. As in Alaska, business size determines how many hours they must provide—up to 40 hours for businesses with under 20 employees or 56 hours for those with 20 or more. Sick time can be accrued or frontloaded depending on the employer’s discretion. 

How does this affect payroll tech providers?

If your customers’ states haven't passed employment-related ballot measures, you should prepare for 2025 as usual. If their states have new rates, make sure to account for them by the effective date. That’s January 1, 2025 for Missouri. You have more time to incorporate the upcoming changes in Alaska and Nebraska. 

With a wave of minimum wage increases and paid sick leave programs on ballots across the country, it’s likely we’ll see this trend continue into 2025 and beyond. 

Minimum Wage Changes – Nationwide

Aside from the minimum wage changes on the ballot, scheduled minimum wage updates are slated on the state and local level. 

What you need to know

There are 40 states with updated minimum wage rates effective January 1, 2025, and there are 61 different local jurisdictions—cities and counties—with changes also effective on the first of the year. As we draw closer to January, more states and local jurisdictions are likely to announce their updated rates. 

Overall, there is a trend of wage increases, whether due to inflation, legislation, or ballot measures. The top five states that will lead the country with the highest minimum wages in 2025 are:

Washington: $16.66 per hour statewide. The state’s highest local minimum wage will be in Tukwila, at $20.29 per hour.

California: $16.50 per hour statewide. The state’s highest local minimum wage will be in West Hollywood, at $19.65 for large employers, followed by $19.00 for large employers in Sunnyvale.

Connecticut: $16.35 per hour statewide. There are no local minimum wage rates in Connecticut.

New Jersey: $15.49 per hour statewide. There are no local minimum wage rates in New Jersey.

New York: $15.50 per hour statewide. The state’s highest local minimum wage will be in New York City, Long Island, and Westchester Country at $16.50 per hour.

How does this affect payroll tech providers?

There has been an ongoing movement to get the federal minimum wage to $15 an hour, with many states continuing toward that wage even with a stagnant federal minimum. Many states are also taking inflation into account when enacting yearly minimum wage increases. Make sure to check the states your customers operate in to account for any upcoming changes before the effective date and explore this guide on mastering multi-state payroll if they employ workers that live and work in different states.

State Income Tax (SIT) Updates – Hawaii, Iowa, Kentucky, Maine, Michigan

With January 2025 fast approaching, staying ahead of payroll tax compliance updates is more important than ever. To support your customers through these changes, it’s crucial to know which State Income Tax (SIT) updates could have the biggest impact. In particular, a few states—Hawaii, Iowa, Kentucky, Maine, and Michigan—are gearing up for significant shifts.

Hawaii

Hawaii has updated their withholding tax calculation for the first time in over a decade as per the guidance of the recently passed House Bill 2404. The new calculation for January 1, 2025 now includes an extra lump sum withholding allowance of $1,650 per year, along with updated percentage table values for single and married filers. The annual regular withholding allowance amount remains at $1,144.

Iowa

Iowa has revamped its withholding tax formula following the passage of Senate File 2442. The state transitioned to a simplified flat tax rate of 3.80%, replacing its previous structure of three tax brackets that closely aligned with the federal withholding tax system. This change significantly lowers withholding taxes for many residents.

Kentucky

Kentucky has updated its Withholding Computer Formula, effective January 1. While the tax rate holds steady at 4%, the standard deduction is getting a boost, rising from $3,160 to $3,270. This adjustment aims to provide a slight tax break for residents as the new year begins.

Maine

Maine will start 2025 with updated withholding tables and a slight increase in the personal exemption amount. The exemption has risen from $5,000 to $5,150, offering a small bump in tax relief for the year ahead.

Michigan

Michigan’s tax rate will steady at 4.25% for 2025, after a temporary reduction in 2023. The increase back to 4.25% has been a point of political contention, which leaves room for this rate to change in the future. Additionally, the personal exemption amount has increased from $5,600 to $5,800.

What does this mean for payroll tech providers?

All SIT changes must be incorporated into withholding calculations by the end of the year. That includes updating state tax tables and accurately programming the latest rates within payroll systems, as well as validating new rates through testing. The earlier testing begins, the less likely you’ll encounter errors when the updated SIT rates are effective.

SECURE ACT 2.0 – Nationwide

While the SECURE (Setting Every Community Up for Retirement Enhancement Act) 2.0 Act was enacted in 2022 to make retirement benefits more accessible to more workers, including part-time employees. Regular updates—including ones effective January 1, 2025—continue to be implemented to improve eligibility, allowances, and ease of enrollment.

Automatic enrollment

Starting on the first of the year, automatic contribution arrangements will be mandatory for all eligible 401(k) and 403(b) plans established after December 29, 2022. Eligible employees will automatically be enrolled in these retirement plans with initial contribution rates between 3% and 10% of pre-tax earnings, though employees may choose to opt out. The contribution rates will increase annually by 1% until they reach a minimum of 10% and a cap of 15%. Businesses with 10 or fewer employees and new businesses under 3 years old are exempt.

Payroll tech providers need to prepare their systems for this change and ensure updated withholding is accurate for those customers affected. 

Enhanced catch-up contributions

Also active on January 1st will be the option for enhanced catch-up contributions. This allows participants in 401(k) and other employee-sponsored retirement plans who are 60 through 63 to make larger catch-up contributions to their accounts by the end of the year. The enhanced limit is either $10,000 or 150% of the regular catch-up limit, whichever is greater. That’s a significant difference from the regular limit of $7,500 per year.

This is an optional amendment for plan sponsors. Payroll tech providers must identify customers that will be participating in this update and adjust contribution calculations and limits accordingly to ensure ongoing compliance.

Eligibility for long-term part-time employees

2025 will bring about an update for how long a part-time employee working at least 500 hours per year must be employed to be eligible in 401(k) or ERISA-covered 403(b) plans if they are at least 21 years old. Previously, the employee had to have three consecutive years of service under their belt to enroll, but for plans starting in 2025, the employee will be eligible after two consecutive years. 

To prepare, payroll tech providers should ensure their customers are time-tracking properly and help to identify employees who will become eligible under the new provision. They must also prepare to update contribution amounts for enrolled employees. 

Preparing for 2025

With a large slew of changes to withholding and payroll coming in 2025, what can you do to prepare? Careful year-end planning will help payroll providers and employers navigate the complex regulatory changes, overcome challenges, and ensure smooth operations from the start of the new year.

Final preparations to take in 2024

Updating and testing new rates: To prepare for updated rates, verify state tax tables and set up payroll systems with the latest rate adjustments so that withholding calculations are accurate from the first paycheck of 2025. Conduct thorough testing during this period to ensure every update is functioning correctly. If you don’t have exact rates yet, set up what you can to move quickly when the pertinent information becomes available.

Review employee information: Given that state tax obligations are often tied to employee work and residence locations, providers should work with clients to confirm that their employee addresses are current. This will help avoid misclassification issues and make sure that employees are paying into the correct tax jurisdictions. Finally, end-of-year reconciliations are crucial, including W-2 reconciliations and validating employee benefit coding.

What to prioritize in January

Agility and communication: As the new year begins, payroll tech providers should prioritize accurate tax handling for the latest SIT updates and be ready to implement any last-minute adjustments that states may announce. Client communication will be especially important at the beginning of the year—keeping customers informed on SIT changes and compliance requirements ensures a smooth transition and helps avoid misunderstandings and penalties.

Form updates: Encourage your customers to have employees update their W-4 forms if needed, especially for employees who claim exempt status, as these exemptions often require renewal at the start of the year. You can also remind clients about headcount and address verifications that may be required for compliance reporting later in the year.

Starting the Year Strong

Knowledge is power—especially when it comes to payroll tax compliance. By closely monitoring legislation and proactively implementing updates, payroll tech providers can ensure customers remain compliant with new state requirements throughout 2025. But the large volume of updates can be intimidating to understand yourself, let alone guide your customers through.

A trusted partner like Symmetry can make all the difference when navigating the complexities of payroll compliance. With Symmetry's trusted payroll tax compliance technology, your payroll processes are always up-to-date. From precise gross-to-net calculations using the latest withholding rates to seamless employee onboarding with accurate tax forms, Symmetry keeps your business compliant as payroll tax legislation evolves.

Approach 2025 with the confidence that you’re ready to handle every new payroll tax compliance requirement. Instead of wading through tax tables, the right support enables you to integrate updates seamlessly, keeping operations compliant and letting you focus on your own goals for the year ahead.