Stay Compliant: Compliance Updates from December 2024

Federal Employment Tax and Compliance Updates

• The IRS released the finalized version of Publication 15-T, Federal Income Tax Withholding Methods, which updated for 2025 the formula used to calculate federal withholding tax on a paycheck.
• The Social Security wage base that’s subject to taxation was increased to $176,100 for 2025, an increase of $7,500 from 2024.
• The IRS announced that several contribution limits for pre-tax deductions are increasing for 2025:
  • Traditional 401(k): $23,500 (Up from $23,000)
  • Health Savings Account (HSA): $4,300 for single/$8,550 for family coverage
  • 403(b): $23,500 (Up from $23,000)
  • IRA: $7,000 (No change from 2024)
• Two states, California and New York, failed to fully pay back its loans from the federal government to meet its state unemployment benefits liabilities. As a result, employers who had employees work in these states in 2024 will face a FUTA credit reduction of 0.9%. The additional tax due to this credit reduction must be deposited and reported on the 2024 federal form 940.

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State and Local Employment Tax and Compliance Updates

• Many states have announced updated 2025 wage base amounts for unemployment tax. An unemployment wage base is the maximum amount of an employee's taxable earnings in a calendar year for which an employer pays unemployment taxes. The following states have updated wage base amounts for 2025:

• Delaware and Maine will begin collecting contributions to their Paid Family Medical Leave Insurance on January 1st, 2025:
  • Delaware’s Paid Family Medical Leave Insurance will collect a total of 0.80% on subject wages, with employers being able to cover ½ of those total contributions. Employees will be able to collect benefits beginning in 2026.
  • Maine’s Paid Family Medical Leave Insurance will collect a total of 1.00% on subject wages, with employers being able to cover half of those contributions. Similar to Delaware, employees will be able to collect benefits beginning in 2026.
• Several states have announced 2025 updates to their withholding formulas. While most states have adjusted their formulas to account for year to year inflation amounts, a few states have made more significant changes to employee withholdings:
  • Iowa: Iowa Governor Kim Reynolds approved a bill that implements a single tax rate of 3.8% for 2025. This replaces the previous three withholding brackets.
  • Louisiana: House Bill 10 imposes a flat tax rate of 3%, which replaced a tier system of rates that ranged from 1.85% to 4.25%.
  • Missouri: Missouri announced that the state’s income tax rate will decrease to 4.7% (from 4.8% in 2025).
  • West Virginia: 2025 rates will range from 2.22% to 4.82%, whereas previously the rates ranged from 2.36% to 5.12%

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Minimum Wage Updates

• While the federal government has announced that there will be no update to the federal minimum wage ($7.00/hr), several states have announced updates to their 2025 minimum wage amounts:

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Is Exempting Tips From Income Tax Is A Good Idea?

Both Vice President Kamala Harris and President-elect Donald Trump proposed exempting tip income from federal income taxes while on the campaign trail. This proposal could be interpreted as strategically aimed at lowering taxes for workers in key swing states like Nevada, where tips make up a large portion of many workers' earnings.

Currently, tips are treated as income and are subject to federal and state income taxes. These campaign trail proposals are not defined precisely, but the general belief is that  tips would not be subject to federal income tax. Similar to how some states have floated proposals to not tax tips. This policy could help tipped workers—typically lower- to middle-income earners—who could benefit from reduced tax bills. Think of service industry jobs like waitstaff, housekeepers, and baristas. With extra cash in their pockets, these workers might increase spending and savings. However, a deeper dive into the implications of this proposal reveals broader potential drawbacks to tipped workers, consumers, and millions of other working class people.

Tipping culture

One of those effects is the increase in “tipping culture.” Over the past decade, tipping has expanded far beyond traditional service roles like waitstaff or salon workers. Today, tipping is increasingly expected in industries like coffee shops, delivery, or fast food restaurants, largely due to the rise of tipping prompts on digital payment systems and apps.

If tips are exempt from federal taxes, this trend could accelerate. Workers may prefer to receive more of their income through tips, as it increases their take-home pay. Similarly, employers—especially in low-wage industries—who benefit greatly from offsetting fair wages with tips, could lean even further on tipping as a way to boost employee morale and retention without paying sustainable wages.

This shift could also lead businesses to encourage higher tip percentages, putting more burden and stress on financially strapped consumers. For instance, default tip options may start at 20% instead of 15%. While consumers wouldn’t be forced to tip more, many people opt for default options, making this a likely outcome.

Non-tipped workers

Additionally, exempting tips from federal income tax greatly benefits one specific class of workers, the service industry, where tips are common. It does not help out the millions of other workers where tips are not a standard part of an employee's wages.

Exempting tips from federal income taxes disproportionately benefits workers in tipped industries, leaving others behind. For instance, consider an auto mechanic and a waiter at a high-end steakhouse, both earning $30,000 annually. If only tips are exempt, the waiter’s take-home pay could be $1,600 higher than the mechanic’s, despite earning the same gross income.

This inequality highlights a fundamental issue with the proposal. While well-intentioned, it excludes millions of low- to middle-income workers whose wages don’t include tips, such as retail workers, construction laborers, and administrative staff.

Better for politicians than workers

While exempting tips from taxes may be a good strategy for winning specific votes, it is not a good strategy to reduce taxes for low- to-middle-income workers generally. A more equitable policy aimed at benefiting all low- and middle-income earners, rather than just those in tipped industries, would be a fairer, more helpful, and more popular solution.

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