As we reach the halfway point of 2025, now is an excellent time for both employees and employers to make sure they will reach their payroll, tax and financial objectives for the calendar year. The following items should be reviewed for possible action steps before your last payroll of 2025.
ON TRACK TO MEET YOUR RETIREMENT FUNDING OBJECTIVE?
An employee can contribute up to $23,500 this year from payroll as “elective deferrals” to their 401(k) and 403(b) retirement accounts. If an employee is at least age 50 by 12/31/25, an additional $7,500 can be contributed as a “catch-up” contribution. If you are participating in a SIMPLE-IRA plan through your employer, the maximum 2025 employee contribution amount is $16,500, plus $3,500 as an additional “catch-up” for those at least age 50.
BRAND NEW for 2025 – “super catch-up” for those ages 60-63 of 50% more than the regular age 50 catch-up – an additional $3,750 for 401(k)/403(b) or an additional $1,750 for SIMPLE employee funding. So, employees ages 60-63 may contribute up to $34,750 to a 401(k)/403(b) or $21,750 to SIMPLE IRA’s in 2025. (See our blog post about the Secure Act 2.0.)
*An employee must be at least age 50 by 12/31/25 to contribute the “catch-up” contributions, and ages 60-63 by 12/31/25 to participate in the “super catch-up.”
NOTE – The maximum compensation which can be “counted” for defined contribution retirement plans is $350,000 for 2025 (which produces a funding “cap” of $70,000 in 2025).
Review your year-to-date payroll details to determine if you will “hit” your retirement plan targets for 2025.
HSA TARGETS ON TRACK FOR 2025?
The maximum permitted funding for 2025 to health savings accounts is $4,300 for a “self-only” HSA and $8,550 for a “family” HSA. Employees who are ages 55-65 this year can add an additional $1,000 to the maximum allowable 2025 HSA funding.
These HSA funding limits are the total combined amounts which can be contributed by an employee plus any employer matching contributions. Be sure to let AccuPay know if you fund employee HSA’s outside of payroll, as this information must be reported on the employee W-2.
FLEXIBLE SPENDING ACCOUNTS (FSA’s)
Those employees who are enrolled in employer “flexible spending account” programs should review their 2025 FSA contributions (limit of $3,300 for 2025) how much they have spent, and how much remains to be spent by year-end (or a later “grace period date” in early 2026 if the employer plan includes a grace period). If the employer’s Section 125 plan includes a “rollover provision,” an employee can carry/roll over up to $660 per year of unused FSA funds to the following year.
Contributions to “dependent care” FSA accounts (for childcare) are limited to $5,000 in 2025 (OR $2,500 if “married filing separately” as your tax filing status.)
COLLEGE CHOICE 529 PLAN FUNDING
For employees whose employers are sponsoring Indiana College Choice 529 plan payroll deduction plans, the State of Indiana provides an Indiana resident with an income tax credit in the amount of 20% of up to $7,500 of Indiana 529 education plan funding, per household. Essentially, if a household (married filing jointly) contributes $7,500 into an Indiana 529 education plan, the State of Indiana gives you $1,500 back in the form of a tax credit on your 2025 personal tax return. (Maximum tax credit if filing separately is $750 per year).
AccuPay can help an employer set-up a payroll deduction 529 plan as a no-cost employer – sponsored fringe benefit plan for employees. You can contact AccuPay or click here for more information.
ARE YOUR TAX WITHHOLDINGS ON TRACK?
Since the IRS totally revised the employee W-4 tax withholding form in 2019, it is more important than ever that individuals review their 2025 income tax withholdings to ensure they are sufficient to avoid large balances of tax due on their 2025 Form 1040. Here is a link to our previous PayDay, “Mid-Year Paycheck Review – Important,” which includes details about the IRS online calculator you can use to review your 2025 tax withholdings. If you wish to change your withholdings for the balance of 2025, provide your employer with a new 2025 W-4 form.
FAMILY MEMBERS ON THE PAYROLL
If a business owner has children or parents who provide services to their business, putting them “on the payroll” saves income taxes if the children or parents are in a lower income tax bracket than the business owner. The business should pay wages which are consistent with the value of the services, based on time spent and job complexity. For 2025, a child can earn up to $15,000 in wages without paying any Federal income tax. If the business sponsors a 401(k) or SIMPLE-IRA plan, consider paying your spouse “on the payroll” so that he/she can also participate in your business retirement plan for 2025.
REIMBURSE EMPLOYEE VEHICLE EXPENSE
The 2025 IRS standard mileage rate for business is 70 cents per mile.
An employer may choose to reimburse employees at the IRS rate for business miles driven on their personal vehicle, without the reimbursement being reported as taxable wages to the employee. Reimbursements above the IRS mileage rate must be treated as taxable wages.
NOTE — An employer is not required to use the IRS mileage rate for employee reimbursements and therefore can reimburse more (taxable on excess) or less than the IRS rate.
EMPLOYER PAID PARKING
An employer may reimburse or directly pay employees for up to $325 per month during 2025 for parking as a non-taxable fringe benefit. The parking must be job-related and on or near the employer’s business location.
NOTE — “Downtown” employers may want to consider providing non-taxable parking benefits in lieu of taxable employee wages.
“S” CORPORATION PAYROLL MEDICAL PREMIUMS
Based on IRS announcements and positions they have taken within the last few years, it is essential that “S” corporation owner – employees have their medical insurance premiums either paid directly by the “S” corporation or personal health insurance premiums reimbursed by the “S” corporation. Health insurance premiums paid personally by the “S” corporation owner-employee and not reimbursed will not be eligible for the “self-employed health insurance deduction”.
Make sure all employed owners of a “S” corporation have been reimbursed for their premiums by 12/31/25 (if not directly paid by the “S” corporation). Be sure to immediately report these amounts to your payroll specialist so that your 2025 W-2 and fourth quarter payroll reporting is accurate!
“S” CORPORATION OWNER WAGES
“S” corporations which are profitable are required to pay “reasonable compensation” to their owner-employees. If you own a profitable “S” corporation and have taken little or no wages to date in 2025 consult with your tax advisor as to “catching up” your compensation to a “reasonable level” before the end of 2025.
IN CONCLUSION
Contact your Payroll Specialist directly, or contact AccuPay at 317-885-7600 or email payroll@accupay.com to discuss any questions or comments you have about payroll tax planning adjustments needed before year-end 2025.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.