The Social Security Administration announced on October 24 that the 2026 social security wage base will be $184,500, an increase of $8,400 from $176,100 in 2025. As in prior years, there is no limit to the wages subject to the Medicare tax; therefore, all covered wages are subject to the 1.45% tax. As in 2025, wages paid in excess of $200,000 in 2026 will be subject to an extra 0.9% Medicare tax that will only be withheld from employees’ wages.

The social security wage base for self-employed individuals in 2026 will also be $184,500. There is no limit on covered self-employment income subject to the Medicare tax. The self-employment tax rate will be 15.3% (combined social security tax rate of 12.4% and Medicare tax rate of 2.9%) up to the social security wage base. In 2026, the maximum social security tax for a self-employed individual will be $22,878.

Maximum social security tax. The maximum social security tax employees and employers will each pay in 2026 is $11,439, an increase of $520.80 from $10,918.20 in 2025.

Courtesy of PayrollOrg – Rayna Alexander, Esq.

On September 22, the IRS issued proposed regulations to provide guidance on the “no tax on tips” provision of Public Law 119-21, known as the One Big Beautiful Bill Act (OBBBA) [90 F.R. 45340, 9-22-25].

The OBBBA adds IRC §224, which defines the income tax deduction for qualified tips received during the taxable year by individuals in an occupation that customarily and regularly received tips on or before December 31, 2024. Employers will still withhold federal income tax and social security and Medicare taxes. To claim the deduction, a worker must both work in an occupation on the list and receive qualified tips. The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.

The Proposed Regulations

The proposed regulations define “qualified tips” and list occupations that “customarily and regularly receive tips.” Qualified tips must be paid in cash or an equivalent medium (e.g., check, credit card), received from customers or through a tip-sharing agreement, and paid voluntarily by the customer and not subject to negotiation. There are nearly 70 separate occupations of tipped workers, from bartenders to water taxi operators.

The IRS has not released guidance on how employers will report tips for tax year 2025. The OBBBA denotes tax year 2025 as a transition year. For qualified tips reported prior to January 1, 2026, employers would be permitted to approximate tips “by any reasonable method specified by the Secretary” of the Treasury.

Courtesy of American Payroll Org – Jyme Mariani, Esq.

The IRS released cost-of-living-adjustments (COLAs) for 2026 reflecting any increases in excludable transportation fringes and the flexible spending arrangement (FSA) deferral limit, among other changes [Rev. Proc. 2025-32, 10-9-25].

For 2026, the amounts that may be excluded from gross income for employer-provided qualified transportation fringe benefits and qualified parking increase to $340 per month ($325 in 2025).

For plan years beginning in 2026, the dollar limitation for voluntary employee salary reductions for contributions to health FSAs increases to $3,400 ($3,300 in 2025). For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount increases to $680 ($660 in 2025).

The Revenue Procedure also addresses changes for 2025 made by Public Law 119-21, known as the One Big Beautiful Bill Act.

Courtesy of PayrollOrg – Jyme Mariani, Esq.

On Thursday, July 3, the U.S. House of Representatives passed H.R. 1, commonly referred to as the One Big Beautiful Bill Act. The vote came just two days after the Senate narrowly passed the legislation. President Trump is expected to sign the legislation soon.

Payroll-Related Provisions

There are several provisions in H.R. 1 that will affect payroll operations. Here are several from Title VII, Subtitle A, regarding taxes:

• Permanent extension of the Tax Cuts and Jobs Act (Chapter 1).
• No tax on tips (Chapter 2, §70201). The legislation provides eligible individuals a deduction “of an amount equal to the qualified tips received during the taxable year.” The deduction is retroactive to January 1, 2025, and expires on December 31, 2028.
• No tax on overtime (Chapter 2, § 70202). The legislation establishes a deduction, subject to certain limitations, equal to the “qualified overtime compensation received during the taxable year.” The legislation also includes a requirement to report overtime compensation on Form W-2, Wage and Tax Statement. This provision is retroactive to January 1, 2025, and expires on December 31, 2028.
• Increase in Form 1099-MISC and Form 1099-NEC reporting threshold from $600 to $2,000 (Chapter 4, Subchapter D, §70433). This provision is effective beginning with payments made in 2026. The threshold is also subject to inflation adjustments beginning in 2027.

For in-depth coverage of H.R. 1, see Issue 7 of Payroll Currently, which has a publication date of July 11.

To learn how this will affect your year-end processing and to prepare for changes in 2026, plan to attend one of PayrollOrg’s Preparing for Year-End programs this fall!

Curtis E. Tatum, Esq., is In-House Counsel and Senior Director of Federal Payroll Resources for PayrollOrg.

The IRS announced the changes to the dollar limits on benefits and contributions under qualified retirement plans, as well as other items, for tax year 2025 [Notice 2024-80, 11-1-24].

IRC §415, which provides for dollar limits on benefits and contributions under qualified retirement plans, requires that the IRS annually adjust these limits for cost-of-living changes. The IRC also requires various other amounts to be adjusted at the same time and in the same manner as these dollar limits.

The limitation on the exclusion for elective deferrals under §402(g)(1) (e.g., §401(k) and §403(b) plans) increases to $23,500 (from $23,000)
Courtesy of the PayrollOrg

The IRS released cost-of-living-adjustments (COLAs) for 2025 reflecting any increases in excludable transportation fringes and the flexible spending arrangement (FSA) deferral limit, among other changes [Rev. Proc. 2024-40, 10-22-24].

2025 COLAs for Transportation Fringes, FSA Deferrals

For 2025, the amounts that may be excluded from gross income for employer-provided qualified transportation fringe benefits and qualified parking increase to $325 per month ($315 in 2024).

For plan years beginning in 2025, the dollar limitation for voluntary employee salary reductions for contributions to health FSAs increases to $3,300 ($3,200 in 2024). For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount increases to $660 ($640 in 2024)
Courtesy of PayrollOrg

The Social Security Administration (SSA) announced on Thursday, October 10, that the 2025 social security wage base will be $176,100, an increase of $7,500 from $168,600 in 2024. As in prior years, there is no limit to the wages subject to the Medicare tax; therefore, all covered wages are subject to the 1.45% tax. As in 2024, wages paid in excess of $200,000 in 2025 will be subject to an extra 0.9% Medicare tax that will only be withheld from employees’ wages. Employers will not pay the extra tax.

Maximum social security tax. The maximum social security tax employees and employers will each pay in 2025 is $10,918.20, an increase of $465 from $10,453.20 in 2024.

Courtesy of PayrollOrg.

The IRS released the optional “high-low” per diem rates for lodging expenses and meals and incidental expenses (M&IE) that may be used instead of the General Services Administration’s “actual” per diem rates for travel to locations within the continental U.S (CONUS).

The updated high-low rates apply for travel undertaken on or after October 1, 2024. Notice 2024-68 also lists the special federal M&IE per diem rates applicable to the transportation industry and the per diem rate for incidental expenses.

High-Low Rates

The “high” rate for lodging expenses and M&IE increases to $319 (from $309) for travel to any high-cost locality, while the “low” rate increases to $225 (from $214) for travel to any other locality within CONUS. The rates for M&IE increase to $86 (from $74) for high-cost localities and to $74 (from $64) for any other locality within CONUS. The notice lists high-cost localities with a federal per diem rate of $272 or more for all of the calendar year or the portion of the calendar year specified.

Courtesy of PayrollOrg

The IRS released its annual inflation adjustment to the percentage of household income used to determine whether an employer’s offer of health care coverage under the Affordable Care Act (ACA) is affordable [Rev. Proc. 2024-35, 9-6-24].

For plan years beginning in 2025, the percentage of household income increases to 9.02%. The household income percentage for plans beginning in 2024 was 8.39%.

Household Income and Affordability

The ACA’s employer mandate requires applicable large employers to offer minimum essential coverage (MEC) that provides minimum value and is affordable to all of its full-time employees. Affordability is determined as a certain percentage of an employee’s household income. Using the adjusted percentage for 2025, if the required employee premium contribution does not exceed 9.02% of the employee’s household income, then the coverage is affordable under the ACA.

Safe Harbors

Because employers do not necessarily know an employee’s actual household income, there are three safe harbors that may be used instead. The safe harbors are based on: (1) an employee’s Form W-2 wages; (2) an employee’s rate of pay; and (3) the federal poverty line. If the required employee premium contribution does not exceed 9.02% of one of the safe harbors, it will be deemed affordable.

Courtesy of PayrollOrg.

On July 17, the IRS announced that some amended employment tax returns can be electronically filed using the Modernized e-File (MeF) program [IRS, Post Release Changes to Forms, Electronic Filing of Some Amended Employment Tax Returns Is Now Available, 7-17-24].

Amended Returns That Can Be E-Filed

These amended employment tax returns can now be e-filed:

• Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return
• Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund
  
  
• Form 943-X, Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund
• Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund

MeF cannot be used yet to e-file Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund, or Form CT-1 X, Adjusted Employer’s Annual Railroad Retirement Tax Return or Claim for Refund.

Courtesy of PayrollOrg.