Year-End Guide 2025

Secure 2.0 Act: Catch-Up Contributions Must Be Roth (Effective 1/1/2026)

Important update: The IRS updated the wage threshold from $145k to $150k for 2025. (IRS Notice)

What’s Changing

Employees who are age 50 or older can make extra catch-up contributions to their retirement plan on top of the regular annual deferral limit.
In the past, participants could choose whether those catch-ups were pre-tax or Roth (post-tax).
Beginning January 1, 2026, that choice changes for certain higher-earning employees.

New Requirement

Starting in 2026, if an employee earned more than $150,000 in wages subject to Social Security tax (FICA) from the same employer in the prior calendar year, then all catch-up contributions for that year must be made as Roth (after-tax).
If the employee earned $150,000 or less in FICA wages from that employer last year, they may continue to choose pre-tax or Roth for their catch-up contributions.

Example

An employee who earned $160,000 in 2025 from your company and is 50 or older in 2026 → their 2026 catch-up contributions must be Roth (after-tax).
An employee who earned $100,000 in 2025 → can still decide whether to make their 2026 catch-up as pre-tax or Roth.

Key Points to Know

The $150,000 threshold applies per employer, based on FICA wages from the prior year only.
The rule affects catch-up contributions (the amount allowed for employees 50+), not regular 401(k)/403(b) deferrals.
If your plan does not currently offer a Roth option, you’ll need to add one by 2026 to keep allowing catch-up contributions for affected employees.
Regular contribution limits under Section 402(g) still apply as usual.

What Employers Need to Do Now

Coordinate with your retirement plan provider or advisor.

They can confirm whether your qualified plan currently allows Roth contributions and advise on any amendments needed before January 1, 2026. They can also guide you on how to communicate this change to employees who will be affected.

Confirm whether your plan will support Roth catch-up contributions in 2026.

The new rule requires Roth catch-up for certain employees. If your plan does not offer Roth today, you will need to work with your plan provider to add it.

Identify which employees may be affected.

Any employee who earned more than $150,000 (indexed) in FICA wages from your company in 2025 and who is age 50 or older in 2026 will have mandatory Roth catch-up treatment.

Prepare employee communication.

Once you confirm Roth availability in your plan, share upcoming changes with impacted employees so they understand how their catch-up contributions will be handled in 2026.

Complete PayNW’s required form.

After confirming Roth availability with your plan provider, fill out the PayNW form indicating whether your plan supports Roth catch-up contributions.

OBBBA – No Tax on Tips and Overtime

What qualifies for tax relief

Overtime

Only overtime that is required under the Fair Labor Standards Act for hours worked over 40 in a workweek qualifies. The amount eligible for tax relief is the premium portion that is above the employee’s regular rate of pay. This is the extra half-time paid when overtime is calculated at time and one half. Overtime paid under state law daily overtime rules, employer policy, or a collective bargaining agreement may not qualify unless it is also required under the federal FLSA. Additional IRS guidance is expected.

Tips

Tips must be cash or equivalent voluntary tips. This includes credit or debit card tips and tip-pool distributions received by employees working in occupations the IRS identifies as “customarily and regularly” receiving tips as of December 31, 2024.

Transition Penalty Relief for Tax Year 2025

For 2025 only, employers and payors will not be penalized if they do not provide a separate accounting of cash tips or the occupation of the person receiving tips or separately report the total qualified overtime compensation. This relief applies only if the employer or payor still submits a complete and correct return, such as Forms W-2 or 1099.

Update for 2026

Overtime
- Beginning in 2026, employers are required to separately report the overtime premium portion of pay on employee W-2s. The premium is the additional pay earned for overtime, not an employee’s regular wages.
Tips
- Beginning in 2026, employers are required to separately report qualified tips on employee W-2s. Qualified tips include tips received by employees in the course of their work that are subject to federal income tax reporting.

Reminder of Standard Payroll Processing Schedule

As a reminder, the standard payroll processing schedule is to submit payroll to us by 1:30PM PT, at least 2 business banking days prior to your check date. Payrolls submitted later are subject to rush processing fees.

Delivery and Holiday Schedule

Holiday Delivery Times

PayNW exclusively uses next-day delivery via FedEx. If you are concerned about the time of day in which your payroll delivers, particularly with the holidays, consider processing a day early.

Electronic W-2 / 1099 / 1095-C Delivery

For employers who have chosen to enable Electronic Consent, employees may choose to receive their W-2s / 1099s / 1095-Cs electronically, in lieu of a paper copy by December 26th.

PayNW Holiday Season Schedule

PayNW will be closed to observe all Federal Holidays in 2025.

Thanksgiving Day, November 27th
Christmas Day, December 25th

PayNW will be closed to observe all Federal Holidays in 2026.

New Year's Day, January 1st
Martin Luther King Day, January 19th
President's Day, February 16th
Memorial Day, May 25th
Juneteenth, June 19th
Independence Day, July 3rd
Labor Day, September 7th
Indigenous Peoples' Day, October 12th
Veterans' Day, November 11th
Thanksgiving Day, November 26th
Christmas Day, December 25th

PayNW Year-End Deadlines for Changes

Payroll Adjustments and Special Items

The deadline for reporting fourth-quarter and year-end payroll-related information and/or an adjustment is Wednesday, December 31, 2025.

Payroll-Related Policy Changes

Alterations to company policies that will affect 2025 payrolls should be submitted to your Service Representative at support@paynw.com 3 weeks prior to payroll processing.

BENEFIT RENEWALS

We request you send us your benefits information a minimum of 30 days prior to your open enrollment start date. This allows us to complete the configuration changes timely. Late submissions may incur additional fees.

Complete Prior to Last Payroll of the Year

Review And Update All Employee-Related Information For Accuracy Including:

Employee Social Security numbers, date of birth, and addresses
Employee Name should be formatted to match their Social Security card
Review/Update SOC codes assigned to employee profiles (for unemployment returns in AK, LA, SC, WA, and WV)

Report Any Remaining 2025 Payroll-Related Information And/or Adjustments Including:

In-house checks
Voided checks
Fringe benefits (S-Corp Insurance for owners, Personal Use of Company Car, Group Term Life in excess of $50K, etc.)
Deferred Comp
Short-term disability payments

Report Third-Party Sick Pay (Disability Payments)

Insurance companies must notify you of any disability benefits paid to your employees in 2025 by January 15, 2026.

Tax Registration Services Available

At PayNW, we're experts in payroll tax registration. We're fast and efficient, ensuring that your new states are registered as quickly as possible so you can start paying payroll taxes in compliance with state regulations.

Important Tax Updates and Agency Notices for 2026

UI And L&I Rate Change Notices

State Unemployment and state workers' comp programs, including Washington Labor and Industries (L&I), will mail 2025 rate change notices starting this month directly to your business.

New Payroll Taxes in 2026 Effective January 1, 2026

Paid Family Leave Information

Below is a link to more information on different states and their Paid Family Leave laws across the United States. DOL Paid Leave Website

Minnesota Paid Family Leave

All Employers with 1 or more Minnesota employees (except for tribal nations, federal government employees, and self-employed)
Employers with a count of 30 or less employees can qualify for a reduced small employer premium rate and an average employee wage that is less than 150% of the statewide average weekly wage
Employee counts are based on the highest single wage detail report during the four-quarter period that ends September 30 of the prior year.

Updated Payroll Taxes and Laws - 2026

Connecticut Paid Sick Leave Updates

Starting January 1st, 2026 covered employers definition will update from 25 or more employees in CT to 11 or more employees in CT.

ACA Manager Service

For clients subscribed to our ACA Manager Service

Complete the 2025 ACA Year End Checklist by January 9th, 2026.

2026 Minimum Wage Increases

As we approach the end of the year, it's important to be aware of the minimum wage changes scheduled for 2026. Each state sets its own minimum wage, and some cities have their own rates that may differ from the state minimum.

Protect Employees and Your Business From Payroll Fraud

It is crucial to ensure you and your employees are protected. We highly recommend voice verification for direct deposit changes.

NACHA Operating Rules Reminders 2025-26

NACHA rules specific to client originators include:

Client agrees not to provide any payroll information or entries which violate the laws or regulations of the United States or of any state in which Client does business
Client agrees to comply with all NACHA operating rules and guidelines