Compliance Corner: Payroll Updates from Q2 2025
Staying on top of payroll compliance updates is a constant challenge for HR and payroll professionals, and Q3 2025 brings another wave of significant changes you need to know about.
From new fair workweek ordinances to shifts in state tax laws and federal contribution limits, these updates can impact your organization's bottom line and employee satisfaction. Let's dive into the latest information to help you navigate these changes with confidence.
State compliance updates
Alabama
Set to ease tax rules for temporary out-of-state workers
Alabama joins a growing number of states adopting mobile workforce tax laws with a 30-day safe harbor, under HB 379, signed by Gov. Kay Ivey, which exempts nonresident employees and their employers from income tax and withholding requirements for work lasting fewer than 30 days.
The bill, unanimously passed by both legislative chambers, aligns with a model law designed to ease compliance and reduce administrative burdens for businesses operating across state lines.
Ending state income tax exemption for overtime wages
Alabama will end the exemption of overtime wages from state income taxation on June 30, 2025. As of July 1, 2025, overtime wages will be subject to state taxation. Employers will no longer be required to report overtime wage data to Alabama once the employer has reported the final exempt overtime wages on the monthly or quarterly tax withholding.
Alabama also provided the following guidance for year-end reporting of exempt overtime wages:
“Each employer should still denote the amount of exempt wages an employee earned during the period of the 2025 tax year in which the exemption was in effect within Box 14 of employee’s Form W-2 using ‘EX OT WAGES’ as the indicator. Do not include exempt overtime wages in Box 16 of the W-2.”
For more information, visit the Alabama Department of Revenue website.
Arkansas
Lowered e-filing threshold
In a major step toward modernizing tax compliance, Arkansas has reduced the electronic filing (e-filing) threshold for Forms W-2 and 1099. Beginning with the 2025 tax year (including filings due by January 31, 2026) employers who issue 75 or more W-2 forms must now submit them electronically.
California
Ensuring compliance with meal waiver enforcement
On April 21, 2025, the Appeals Court of the State of California ruled in a class-action lawsuit, Bradsbery v. Vicar Operating, Inc., about whether employers and employees are allowed to have a prospectively signed meal break waiver. The case involved two employees who alleged their employer failed to provide the mandated meal periods as outlined in California Labor Code Section 512 and IWC Wage Orders Nos. 4-2001 and 5-2001.
The employees had voluntarily signed a waiver to renounce their 30-minute meal breaks for shifts lasting between 5 and 6 hours. This waiver may be withdrawn at any time.
After careful review, the Court of Appeal determined that the waivers were enforceable, provided there was no evidence of them being unconscionable or unduly coercive. The decision aligns with the intent and provisions of Section 512 and the relevant Wage Orders.
This ruling highlights that employers may implement meal break waivers, ensuring they are fair and not used to impede employees' rights to their meal periods. Employers should review their waiver practices to ensure compliance and protect employee rights.
Read the ruling in full here.
Los Angeles County
Fair Workweek Ordinance takes effect in July 2025
Starting July 1, 2025, the Los Angeles County Fair Workweek Ordinance will be implemented, impacting businesses classified as retail businesses under the NAICS, located in unincorporated areas of the county, and with 300 or more employees globally.
Key provisions of the ordinance:
- Work schedule estimates: Employers must provide a good-faith estimate of future work schedules. Current employees should receive this within 10 days of their request, while new hires must receive it before their start date.
- Advance notice: Employees must be given at least 14 days' notice of their work schedules. If changes occur with less than 14 days' notice, a written notification is required.
- Predictable pay: Employers must offer predictable pay for any schedule changes initiated with less than 14 days' notice.
- Additional work hours: Current employees should be offered extra work hours before new employees are hired.
- Protected absences: Employees can miss a shift for legally protected reasons without needing to find coverage.
- Rest between shifts: Employees are entitled to at least 10 hours of rest between shifts. If this is not provided, they must receive time-and-a-half pay for the next shift.
- Workplace notice: The Office of Wage Standards notice must be prominently displayed at all workplaces or worksites.
Document retention requirements:
Employers must retain the following documents for a minimum of three years:
- Work schedules
- Written offers and responses to requests for additional work hours
- Written correspondence regarding schedule changes
- Good-faith estimates of work schedules
- Any other documentation required for compliance
Compliance and penalties:
Non-compliant employers may face restitution and penalties payable to affected employees.
Colorado
Paid Family Medical Leave rates announced for 2026
On May 30, 2025, Colorado's governor signed into law SB 25-144, which revises the premium rate for the state's Paid Family and Medical Leave program, effective January 1, 2026. The new premium rate is set at 0.88%, a slight decrease from the 2025 rate of 0.9%.
Future premium rates will be determined by the director of the Division of Family and Medical Leave Insurance by September each year.
For more detailed information, you can read the full text of the bill here: SB 25-144.
Georgia
Withholding rate decreases effective July 1, 2025
Georgia’s state income tax rate will decrease on July 1, 2025 from 5.39 to 5.19%. This rate will be retroactive to January 1, 2025. Georgia will continue to decrease by 0.1% each year on January 1 until it reaches 4.99%.
Maryland
PFML launch postponed to 2027
On May 6, 2025, Maryland's governor signed into law HB 102, officially delaying the implementation of the state's Paid Family and Medical Leave (PFML) insurance program. Originally set to begin this summer, the program's payroll deductions will now start on January 1, 2027, with benefits becoming available to employees starting January 2028.
This postponement provides employers with additional time to prepare and familiarize themselves with the new program, ensuring a smoother transition when it takes effect.
For more detailed information, you can read the full text of the bill here: HB 102.
Oklahoma
New unemployment insurance legislation
On May 10, 2025, Oklahoma's governor signed into law SB 911, introducing significant changes to the state's unemployment insurance framework. This new legislation reduces the maximum unemployment insurance rate from 9.2% to 6.5%, providing potential cost savings for businesses across Oklahoma.
In addition, the threshold for triggering an unemployment insurance surcharge has been increased from $25 million to $50 million. This means that a surcharge will only be applied if the unemployment fund balance falls below this new, higher threshold, offering greater financial stability and predictability for employers.
These changes are set to take effect on November 1, 2025.
For more detailed information, you can read the full text of the bill here: SB 911.
Oregon
Minimum wage update: Changes effective July 1, 2025
Each year, by April 30, Oregon announces its revised minimum wage rates, which take effect on July 1 of that year. These rates are adjusted annually based on the Consumer Price Index (CPI) to account for inflation.
Starting July 1, 2025, the new minimum wage rates in Oregon will be as follows:
- Standard minimum wage: $15.05 per hour
- Portland metro minimum wage: $16.30 per hour
- Nonurban counties minimum wage: $14.05 per hour
It's important to note that employees should be compensated according to the wage rate of the county where they perform 50% or more of their work hours each week. For employees who travel for work, employers may pay the applicable rate for each county where work is performed. Alternatively, employers may pay all hours at the highest of the regional rates applicable to the employee’s work in that pay period.
Oregon law mandates that all employees, including those in training, employees paid on a commission, and minors, must receive at least the minimum wage at all times during their employment.
For more detailed information on the minimum wage increase schedule and guidance on determining the applicable wage for your employees, please visit the following resources: Minimum Wage Schedule and Interactive Minimum Wage Map.
Utah
Withholding rate decreases effective June 1, 2025
Effective June 1, 2025, Utah's state income tax rate will decrease from 4.55% to 4.5%.
Federal Compliance Updates
Health Savings Account contribution limits announced for 2026
In Revenue Procedure 2025-19, the Internal Revenue Service (IRS) announced the 2026 annual contribution limits for health savings accounts, which may be used by employees enrolled in a high deductible health plan.
For 2026, the contribution limit will be $4,400 for self-only coverage and $8,750 for family coverage, an increase from the 2025 limits of $4,300 for self-only coverage and $8,550 for family coverage.
For a plan to be considered a high deductible health plan, the annual deductible must be at least $1,700 for self-only coverage and $3,400 for family coverage for 2026. This is an increase from the 2025 minimum deductible of $1,650 for self-only coverage and $3,300 for family coverage.
IRS encourages taxpayers to check withholding elections now for next year
The IRS reminds taxpayers that proper tax withholding now is key to avoiding surprises when they file their tax return next year. Making any needed adjustments earlier in the year means taxpayers won’t have to make a big change later in the year to catch up.
The IRS Tax Withholding Estimator is a free online tool that helps people determine if they are having the right amount of federal income tax withheld from their paychecks. Using it can prevent taxpayers from having an unexpectedly large tax bill or a substantial refund when they file in 2026.
IRS updates Form 941 Schedule B instructions
On May 29, 2025, the IRS released revised instructions for the attachment for semiweekly depositors to the quarterly federal employment tax return.
Employers wishing to claim COVID-19 sick and family leave credits for wages paid after December 31, 2023, should file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Form 941-X should be filed for the quarter in which the wages were paid after Form 941 is filed, the IRS said, referring to Form 941-X’s instructions for more information.
The IRS recommends employers refer to the March 2023 revision of Schedule B’s instructions for how to adjust their tax liability for the nonrefundable portion of the COVID-19 credits.