Compliance Corner: Payroll Updates from Q3 2025

From major shifts in federal law to shakeups at the state level, Q3 2025 brought big changes to payroll compliance. The One Big Beautiful Bill is now law, impacting income taxes and more. Several states have also made significant adjustments to tax brackets, paid leave, and wage laws.

If you’re still catching up, here’s what’s changed, why it matters, and how you can stay compliant without missing a beat.

Federal updates: One Big Beautiful Bill

New tax deductions for tips and overtime pay

Budget Bill HR 1 (One Big Beautiful Bill Act or OB3) was signed into law on July 4, 2025. The bill contains new provisions on the taxation of tips and overtime.

Under the law, individuals will be able to deduct wages considered “qualified tips” and wages considered “qualified overtime compensation” when they file their individual tax return. Because this will be handled as a deduction, taxation of tips and overtime will proceed as usual during the payroll process.

These provisions retroactively went into effect January 1, 2025, and are set to expire December 31, 2028. The deductions on tips and overtime only apply at the federal level; state and local taxation will continue to be determined according to the pertinent state and local requirements.

The Treasury Department has released a preliminary list of occupations eligible for the new federal deduction for tips. The IRS is expected to release the official list by October 2, 2025.

Increase in contribution limits for Dependent Care Flexible Spending Accounts

As part of OB3, Dependent Care Flexible Spending Accounts will increase from $5,000 to $7,500 for single individuals and married couples filing jointly, and from $2,500 to $3,750 for married couples filing separately. The increase goes into effect on January 1, 2026.

Updates to IRS guidance and forms

The IRS announced no changes to individual information returns or withholding tables for 2025 under OB3.

• Form W-2, existing Forms 1099, Form 941, and other payroll return forms will remain unchanged for the 2025 tax year.
• Federal income tax withholding tables will not be updated for these new provisions for the 2025 tax year.
• Employers and payroll providers should continue using current procedures for reporting and withholding.

The IRS is working on new guidance and updated forms for the 2026 tax year. These will include changes to how tips and overtime pay are reported. The IRS will coordinate with employers, payroll providers, and tax professionals to ensure a smooth transition.

The IRS has released a draft version of the 2026 Form W-2. The draft W-2 Form contains changes based on the OB3, including:

• New Box 12 codes. Box 12 has three new codes: TA (employer contributions to a Trump account), TP (total amount of qualified tips), and TT (total amount of qualified overtime compensation).
• Tip reporting. Box 14 is now “14a Other” and “14b Treasury tipped occupation code.”
  • Employers may use Box 14a to report information such as state disability insurance taxes withheld, union dues, uniform payments, health insurance premiums deducted, nontaxable income, or educational assistance payments.
  • Employers may use Box 14b to report the Treasury occupation code for an employee’s tipped occupation, which is used to report an employee’s qualified tips as required by the OB3. The same Box 14 changes were included in the draft 2026 Form W-2c.

More information will be shared in the coming months about how taxpayers can claim OB3-related tax benefits when they file their returns. The Treasury Department and the IRS are preparing additional guidance for both reporting entities and individual taxpayers.

State family and medical leave updates

Illinois passes Family Neonatal Intensive Care Leave Act

Starting June 1, 2026, Illinois employers will be required to provide unpaid leave for employees with a child in the neonatal intensive care unit (NICU). Employees of small employers (16–50 employees) have the right to a maximum of 10 days of unpaid NICU leave, while employees of large employers (51+ employees) have the right to a maximum of 20 days of unpaid leave.

This law provides critical support for families facing extended NICU stays, ensuring job protection and flexibility during a challenging time.

Key provisions of the act include:

• Employees can take their NICU leave all at once or intermittently (employers cannot require leave increments shorter than two hours).
• Employees cannot be forced to use other forms of paid time off, although they may choose to do so.
• Health insurance must be maintained during the leave period.
• Employees must be reinstated to the same or equivalent job with no loss of benefits.
• Employees cannot be required to provide a replacement worker.
• Employers may request reasonable verification of the child’s NICU stay, but no HIPAA-protected information can be required.

To stay ahead of these changes, update your leave policies to include NICU leave and train your HR team and managers on NICU leave administration. Be prepared to implement a time-off tracking system that records intermittent leave periods.

Maine PFML requires updated employee counts

Third quarter wage reports and premium payments for Maine PFML (paid family and medical leave) are due by October 31. To determine employer contribution rates for 2026, the third quarter report will include a question as to whether 15 or more people were employed for at least 20 weeks between October 1, 2024 to September 30, 2025.

If your employee headcount has changed to above or below 15 people in the past year, be prepared for changes to your PFML premiums in 2026.

• Less than 15 employees: Contribution of 0.5% of wages; employer can deduct the entire amount from an employee’s wages.
• 15 or more employees: Contribution of 1% of wages; employer can deduct half of the amount from an employee’s wages.

Business sizing for Washington PFML premiums

On September 30, Washington state conducted its annual business size calculations to determine PFML employer premiums for 2026. This calculation is based on the average number of employees reported over the past four quarters. Businesses with 50 or more employees are required to pay the employer portion of premiums.

If your business size changes, you’ll receive notification in late October. You can dispute the sizing change by contacting Washington State PFML via phone or email.

State taxation updates

New Colorado legislation confirms overtime pay taxability

On May 16, 2025, Colorado’s governor signed into law HB 1296, ensuring that overtime pay remains subject to state taxation. Unlike federal regulations, where the premium portion of overtime pay is exempt from taxation under the recently passed OB3, Colorado law will continue to treat overtime pay as taxable income under state withholding rules.

This law applies retroactively to January 1, 2025.

Ohio moves toward a flat tax rate

Be sure to review your employees’ state withholding amounts: Ohio is phasing in a flat income tax rate. Retroactively effective to January 1, 2025, the 2025 tax rate for incomes over $100,000 is now reduced to 3.125%. The flat rate will be fully implemented in the 2026 tax year, with all incomes taxed at 2.75%.

Wisconsin expands second-lowest tax bracket

Wisconsin has enacted SB 45, expanding the second-lowest income tax brackets. This expansion applies retroactively to January 1, 2025.

Under the new law, single filers with incomes up to $50,480 and married couples filing jointly with incomes up to $67,300 will now fall under a 4.4% income tax rate. Previously, this rate only applied to single filers earning between $14,320 and $28,640, and married couples filing jointly with incomes between $19,090 and $38,190.

State wage and hour updates

Rhode Island updates Sunday and holiday pay rules

Effective August 17, 2025, Rhode Island’s Department of Labor and Training (DLT) finalized new regulations clarifying how Sunday and holiday premium pay must be calculated:

• Retail businesses (defined as those primarily selling goods or services directly to the public) may now count Sunday and holiday hours toward overtime, reducing “double pay” stacking.
• Non-retail businesses must continue paying Sunday and holiday premium pay in addition to overtime.
• No new exemptions will be issued, though existing ones remain valid.

Employers need to have confirmed whether they qualify as a retail business under the new rules and adjust payroll practices before the August 17, 2025 effective date.

Maine extends minimum wage law; mandates employer payment for reduced work schedules

Minimum wage law

Starting in 2026, agricultural laborers in Maine will be entitled to the state minimum wage under LD 589, signed into law by Governor Janet Mills on June 10.

The law aligns agricultural workers’ pay with the general minimum wage, which is currently $14.65 and adjusted annually for inflation. Beginning in 2027, the agricultural minimum wage will rise annually based on the consumer price index, mirroring statewide wage adjustments.

Certain family members living with and dependent on the employer are excluded from the law’s coverage.

Employer payment for reduced work schedules

Starting September 24, a new Maine labor law will require certain employers to compensate employees when scheduled work hours are reduced or canceled after they’ve already reported to work.

Who’s affected
Employers with 10 or more employees working more than 120 days a year .

What’s required
If an employee shows up for a scheduled shift that’s subsequently cut or canceled, the employer must pay the lesser of two hours’ regular pay or the originally scheduled shift pay.
No payment is required if:

• The employer notifies the employee in good faith not to report.
• The change is due to weather, emergencies, illness, or workplace injury.
• Employees are employed in a seasonal industry or are employed by a public employer covered by a collective bargaining agreement.

The bill became law on June 24, 2025, without the governor’s signature.

State unemployment insurance updates

Oregon unemployment insurance nonrefundable credits for certain employers

On July 24, 2025, Oregon’s governor signed into law HB 2271, announcing that any employer whose tax rate for 2025 is at least 2.5% less than the employer’s tax rate for 2024 shall receive a nonrefundable credit against the taxes due from the employer.

The credit can be applied towards the equal or lesser value of the amount of the taxes due for 2025, must exceed $100, and is capped at $5,000. Additionally, employers must be up‑to‑date on all wage reports and tax liabilities for 2024 and 2025 to be eligible for the credit.

Please note that this credit is effective January 1, 2026, and is set to be repealed on January 2, 2027.

New Hampshire maintains current unemployment insurance rates for Q3 2025

The New Hampshire Unemployment Insurance agency announced that there will be no updated rates for Q3 2025. The tax rate for new employers remains at 1.7%, which includes a 1% reduction due to the solvency threshold tax. According to the agency, there will be no emergency power surcharge in effect for the third quarter of 2025.

The taxable wage base remains $14,000.

The tax rate chart can be found here: New Hampshire UI Tax Rate Chart.