Employer’s Guide to Year-End and 2026 Payroll Tax Changes

ARTICLE | December 17, 2025

Authored by Aprio

Summary: Get up to speed on critical federal, state, and local payroll and employment tax updates for the 2025 year-end and 2026 planning, including SUI changes, FUTA credit reductions, social security limits, paid family leave, and the latest on the OBBB.

As we wrap up 2025 and look ahead to 2026, businesses face a wide range of federal, state, and local employment tax and payroll issues that demand attention. While this update can’t address every detail, it highlights some of the most significant changes your business should consider as the year ends and a new one begins.

Year-End Consolidations: Planning for Organizational Changes

Many organizations are considering internal reorganizations or external integrations timed with the calendar year-end. This strategy leverages the simplicity of a January 1 reporting date and avoids unnecessary restarts for federal and state taxable wage bases. This, of course makes sense from a tax, systems, and organizational standpoint. If your business is planning such moves, keep these critical considerations top of mind:

• SUTA Dumping Compliance: Under the SUTA Dumping Act of 2004 and subsequent state legislation, transactions involving transfers of employees between commonly controlled entities almost always require specific state unemployment insurance (SUI) reporting and consolidation of tax rates. Accurately completing transactional documents is essential for correctly reporting employee movement to the SUI tax authorities, which can help to ensure proper application of the successorship provisions and prevents any allegations of SUTA Dumping.
• Anticipated Rate Changes: SUI tax rates can change post-transaction, sometimes retroactively to January 1, 2026. Generally, SUI tax is accrued either at the new business rate or the general successor rate, but large-scale employee transfers may require protecting successor/consolidated post-transaction rates to prevent underpayments.
• Wisconsin-Specific Issues: Although most states will assign successorship when employees transfer between related entities, Wisconsin has been uniquely restrictive in cases where organizations cannot show that either: a) assets have transferred as part of the transaction and/or b) business activity is transferred. The Wisconsin Department of Workforce Development (DWD) generally will bar successorship if only employees transfer, resulting in either a new employer being established, or the employee movement being barred. Proper planning and documentation can help to mitigate this issue if considered on the front end of the transaction.

In addition to capturing year end integrations, review any large employee transfers that occurred earlier in 2025 that triggered federal or state taxable wage base restarts. Employers may be eligible for refunds by claiming successorship; statutes typically allow three years from the transaction to reclaim overpayments, so refunds from 2022-2025 may still be available.

State Unemployment Insurance: Taxable Wage Bases and Rate Changes for 2026

Each state establishes its own unemployment taxable wage base, the maximum amount of an employee’s earnings subject to state unemployment tax. While some states, such as California and Texas, rarely adjust their wage base limits, other states may raise or lower them in response to economic conditions. Employers should verify the final wage base before closing payroll tax calculations, as last-minute changes are possible. Below is a selection of 2026 taxable wage bases as of December 16, 2025:

Federal Unemployment Tax (FUTA): Credit Reduction and Compliance

The FUTA applies a 6% tax on the first $7,000 of wages paid per employee each year. Employers can typically claim a credit of up to 5.4% for contributions to SUI programs, reducing the net FUTA tax rate to 0.6%. However, if a state has outstanding federal loans used to support its unemployment benefits program and has not repaid them by the federal deadline, the FUTA credit is reduced.

For the 2025 tax year, the IRS announced FUTA credit reductions for employers in California (1.2%) and the U.S. Virgin Islands (4.5%), due to their states’ unpaid federal loan balances. Employers in Connecticut and New York, both subject to reductions in 2024, have since repaid their loans and will not face a credit reduction for 2025.

Any potential 2026 FUTA credit reductions for California and U.S. Virgin Islands will be announced by the IRS in late 2026.

Updated Limits: Social Security, 401(k), HSA, and FSA for 2026

Several taxable wage bases have been updated and require employer attention, including:

• Social Security Wage Base: Increases to $184,500 (up from $176,100 in 2025).
• 401(k) Contributions: Elective deferral limit rises to $24,500; catch-up contributions (age 50+) is $8,000; special catch-up (ages 60–63) is $11,250; total contribution limit is $72,000.
• Health Savings Account (HSA): Self only coverage is $4,400 (+$100); family coverage is $8,750 (+200); catch up contribution (ages 55+) remains at $1,000.
• Flexible Spending Account (FSA): Medical FSA is at $3,400 (+$100); dependent care (single/married filing jointly) is at $7,500 (+$2,500); dependent care (married filing separately) is at $3,750 (+$1,250)

It’s important to note that starting in 2026, the SECURE Act 2.0 introduces a new requirement for high earners, defined as plan participants who received more than $150,000 in FICA Wages, Box 3 Form W-2 for 2025. These individuals must make their 401(k) catch-up contributions on a Roth Basis beginning in 2026, as clarified in recent IRS guidance.

This change will also affect plan administrators who may need to either amend their plan to allow Roth contributions or remove catch-up contributions entirely. Plan administrators will need to contact their payroll provider soon to confirm they can:

• Identify employees meeting the income threshold.
• Process Roth catch-up contributions, including “deemed Roth catch-up” if their plan allows Roth contributions.
• Block catch-up contributions if the plan does not allow Roth contributions.
• Reminder: Deemed Roth catch-up means the plan automatically treats catch-up contributions as Roth for the affected participants — no extra paperwork from the participant is needed. This simplifies administration and helps to maintain compliance, but payroll providers must support this.

If errors are made, there are a few options for correction. However, the IRS requires that each plan has a written correction procedure in place. If a written correction procedure is not in place, the only fix is to refund the mistaken contribution, which is not ideal.

Paid Family Medical Leave (PFML): State and Local Developments

As efforts towards a federal paid family leave law remains stalled, states and municipalities continue to develop their own programs. For tax professionals, the growing complexity of these state and local paid PFML laws demands a nuanced understanding of varying tax implications, withholding requirements, and employer obligations.

As of January 1, 2026, 14 states and the District of Columbia will have enacted mandatory PFML or Paid Medical Leave (PML) programs, with Maryland pending future implementation. Some jurisdictions allow for the implementation of a PFML/PML program through insurance, but do not specifically require coverage. These initiatives generally provide partial wage replacement for employees who take leave for a variety of reasons, including, but not necessarily limited to:

• Bonding with a new child
• Caring for a family member with a serious health condition
• The employee’s own serious medical condition
• Certain military-related exigencies

With state paid family and medical leave programs multiplying across the country, requirements often change rapidly and can vary state-to-state. For a deeper dive into state and local paid family and medical leave, click here.

Key 2026 State Updates:

• Minnesota launches its own PFML program, which goes into effect on January 1, 2026. The PFML program is integrated with Minnesota’s SUI system. Employers must register, split the tax between employer and employee, and provide courtesy notices. The tax treatment outlined below applies only to the state-administered plan; tax treatment may differ if a private plan is used.
• Detailed quarterly reports for unemployment insurance wage will be used to calculate the PFML premiums.
• The 0.88% tax rate of employee wages will be split between employer and employee.
• Employers will see a separate total for SUI taxes and PFML premiums.
• Employers can claim PFML contributions as a business expense (§162) or excise tax deduction (§164).
• Washington’s Family-Leave Insurance premium rates will increase to 1.13%. For employers with 50+ workers, 28.57% is employer-paid; 71.43% is employee-paid. The wage base matches the federal OASDI wage base ($184,500) for 2026.
• New York’s Paid Family Leave (PFL) tax rates will increase to 0.432% with an annual contribution cap limit of $411.91 and is fully funded by employees.

State Employer Income Tax Withholding: Notable Changes

• Massachusetts: The Massachusetts Supreme Judicial Court ruled that a retention bonus is not considered a wage payment. The court determined that the bonus did not constitute compensation for labor or services performed; rather, it functioned as an incentive for the employee to remain with the company following its merger and rebranding.
• New Mexico: Effective January 1, 2026, all employers must e-file withholding tax returns, including Form W-2 tax statements, under House Bill 218. Filing deadlines for the quarterly workers’ compensation fee returns and Form TRD-31109, Employer’s Quarterly Wage, Withholding, and Workers’ Compensation Fee Report have been moved to the 25^th of the month following each quarter. Please note that these forms must now be submitted electronically.
• Oregon: The transit tax rate will temporarily increase from 0.1% to 0.2% for 2026-2027, then returns to 0.1% on January 1, 2028. The tax applies to Oregon residents regardless of where they work, as well as to nonresidents working in Oregon. Residents working outside the state for an employer with no Oregon presence must self-report and pay the tax or have their employer voluntarily withhold it.
• Washington: The family-leave insurance premium rate will rise to 1.13% from 0.92% for 2026. Employers with 50 or more employees must pay 28.57% of the premium, while employees pay 71.43%. Employers with fewer than 50 employees are exempt from the employer share but must continue to withhold and remit the employee portion. The program’s wage base matches the federal OASDI wage base, which will be $184,500 for 2026.

OBBB: New Overtime and Tip Deduction Reporting Rules

The One Big Beautiful Bill (OBBB) introduced two major payroll focused tax deductions for employees and new reporting requirements for employers. However, because of the timing of the OBBB enaction, employer reporting requirements are not standardized for 2025 amounts.

• Overtime Deduction: Employees can deduct up to $12,500 of qualified overtime premiums ($25,000 for joint filers).
  • Applies only to the premium portion of overtime required under the Fair Labor Standards Act (FLSA).
• Tip Deduction: Employees in customarily tipped occupations can deduct up to $25,000 in qualified tips ($50,000 for joint filers) with a phase out for high wage earners (AGI over $150,000 or $300,000 for joint filers). It is important to note that the definition of what the IRS considers to be customarily tipped occupations is not yet finalized and may still be expanded. The preliminary list groups eligible occupations into 8 broad categories:
• Beverage and Food Service
• Entertainment and Events
• Hospitality and Guest Services
• Home Services
• Personal Services
• Personal Appearance and Wellness
• Recreation and Instruction
• Transportation and Delivery
• Reporting: For 2025, employers are encouraged but not required to separately report qualified overtime and tips compensation; penalty relief applies. Beginning in 2026, separate reporting of amounts paid in Box 12 of Form W-2 is required. Aprio’s OBBB Hub is a great resource on the tips and overtime provision.

Final Thoughts: Staying Ahead in a Changing Payroll Landscape

Payroll compliance is constantly evolving, with frequent changes in laws, regulations, interpretations, and wage-related thresholds to consider. While this update highlights major developments for the 2025 year-end and 2026 planning, employers should consult trusted advisors for assistance maintaining compliance in their jurisdictions.

Please connect with your advisor if you have any questions about this article.

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This article was written by Aprio and originally appeared on 2025-12-17. Reprinted with permission from Aprio LLP.
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