Stay Compliant: Compliance Updates from January 2025

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Federal Employment Tax and Compliance Updates

• President Trump, in a Las Vegas speech, reemphasized his pledge to make tax cuts permanent and eliminate federal income tax on tips, highlighting plans to work with Congress and industry leaders to push the legislation forward, despite concerns about its effect on federal revenue.

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State and Local Employment Tax and Compliance Updates

• Mississippi and Missouri have both proposed eliminating income tax in their states. If put into effect, Mississippi and Missouri would join nine other states that currently don’t have income tax.
  
  • Mississippi House Bill 1 ("Build Up Mississippi Act") aims to eliminate the state's income tax by 2037 through gradual reductions, starting with a drop from 4.0% to 3.0% in 2027, decreasing 0.3% per year until reaching 0%. The bill passed the state House on January 16 and is now in the state Senate, with Governor Tate Reeves urging action in his January 29 State of the State Address.
  • Missouri Governor Kehoe proposed eliminating Missouri’s state income tax permanently in his State of the State Address. Governor Kehoe asked the Missouri Department of Revenue to present a comprehensive plan to phase out the income tax.
• Vermont joins a growing list of states who are implementing ‘Pay Transparency Laws’, with Governor Philip Scott signing into law H.704, which requires employers with five or more employees to include wage ranges in job offerings. This law goes into effect July 1, 2025. Vermont joins 13 other states who have implemented pay transparency laws.

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Should overtime be taxed?

President Donald Trump has proposed a tax policy that could have a significant impact on American workers: exempting overtime pay from federal income tax. While the idea may seem like an immediate win for employees, the long-term economic implications raise important questions.

Potential Benefits: Increased Take-Home Pay and Workforce Incentives

The most immediate and obvious advantage of exempting overtime wages from income tax is the potential for higher take-home pay. For millions of workers who receive overtime pay—such as healthcare professionals, law enforcement officers, and manufacturing employees—this could provide meaningful financial benefit. Employees would keep more of their earnings, allowing them to better manage household expenses and savings.

Additionally, the policy could incentivize workers to take on extra hours without adding costs to the business, which would help industries experiencing labor shortages. Businesses that rely heavily on overtime labor, especially in peak seasons, might benefit from a more motivated workforce willing to work additional hours.

Key Concerns: Fiscal Impact and Labor Market Effects

While the benefits to individual workers may be appealing, the broader economic consequences raise concerns. Exempting overtime wages from federal income tax will reduce tax revenue and this loss would need to be offset, either by tax increases elsewhere or budget cuts.

Moreover, there are concerns about how this policy could influence employer behavior. Some businesses may choose to increase overtime hours rather than hiring and training additional workers, leading to reduction in job creation and an overworked labor force. This could be particularly problematic in sectors where job opportunities are scarce or employees are already stretched thin.

Implementation Challenges and Potential Loopholes

A key challenge in implementing this policy would be ensuring compliance and preventing abuse. Employers might attempt to reclassify standard wages as overtime to lower tax obligations, creating unintended loopholes. Additionally, businesses could shift compensation structures—reducing base salaries while increasing overtime opportunities—to maximize tax savings, which could ultimately undermine the financial stability of employees.

Thoughtful Consideration

While the prospect of tax-free overtime is attractive to many workers, the broader economic impact must be considered. Any policy that significantly alters the tax structure should be evaluated not only for its immediate benefits but also for its long-term sustainability and potential unintended consequences.

As this proposal continues to be discussed, Americans will benefit from policymakers weighing the advantages of higher worker earnings against the risks of budget shortfalls, labor market distortions, and administrative complexities.

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Arizona Companies Ordered To Pay $7.4 Million For Overtime Violations

A recent U.S. Department of Labor investigation into two Phoenix-based drywall and painting companies serves as a stark reminder of the risks of payroll non-compliance. Apodaca Wall Systems Inc. and Empire Wall Systems Inc. have been ordered to pay $7,450,000 in back wages and damages after willfully denying overtime pay to over 1,400 employees.

Investigators found the companies used multiple schemes to evade overtime laws, including issuing multiple checks at straight-time rates, paying cash through labor brokers, and distributing piece-rate pay without considering overtime hours. This judgment not only requires full payment of unpaid wages but also permanently prohibits future violations and imposes $125,000 in penalties.

For businesses, this case highlights the importance of compliant payroll practices. Ensuring accurate time tracking, proper classification of workers, and adherence to overtime laws is critical to avoiding legal and financial repercussions. Our payroll software automates compliance checks, reducing the risk of costly violations.

If you’re unsure about your payroll practices, now is the time to review your policies and invest in a system that keeps you compliant.

Source: https://www.dol.gov/newsroom/releases/whd/whd20250117-1

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