The Internal Revenue Service (IRS) has announced the annual adjustments to the standard deduction and tax brackets for tax year 2025, effective January 1, 2025. It’s important to note that these figures will be used to prepare your 2025 tax returns in 2026, not for your 2024 tax returns. Understanding these changes is vital for effective business planning and budgeting.
If you don’t anticipate significant changes in your financial situation for 2025, you can use these updated numbers to estimate your tax liability. However, if you expect changes such as increased income, getting married, starting a business, or having a baby, you should consider adjusting your withholding or estimated tax payments accordingly. Continue reading to understand how the adjustments impact you and your employees.
2025 Tax Bracket Overview
Each year, the IRS adjusts tax brackets to reflect changes in the cost of living, which helps maintain taxpayer purchasing power. For tax year 2025, the top tax rate remains 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly). The other rates are:
- 35% for incomes over $250,525 ($501,050 for married couples filing jointly).
- 32% for incomes over $197,300 ($394,600 for married couples filing jointly).
- 24% for incomes over $103,350 ($206,700 for married couples filing jointly).
- 22% for incomes over $48,475 ($96,950 for married couples filing jointly).
- 12% for incomes over $11,925 ($23,850 for married couples filing jointly).
- 10% for incomes $11,925 or less ($23,850 or less for married couples filing jointly).
Standard Deduction And Personal Exemptions
The IRS defines the standard deduction as a precise dollar amount that reduces the amount of income on which you’re taxed. A standard deduction consists of the sum of the basic standard deduction and any additional standard deduction amounts for age and blindness. The standard deduction has also increased for 2025:
- For single taxpayers and married individuals filing separately for tax year 2025, the standard deduction rises to $15,000 for 2025, an increase of $400 from 2024.
- For married couples filing jointly, the standard deduction rises to $30,000, an increase of $800 from tax year 2024.
- For heads of households, the standard deduction will be $22,500 for tax year 2025, an increase of $600 from the amount for tax year 2024.
- Personal exemptions for tax year 2025 remain at zero, as in tax year 2024. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act of 2017.
Additional IRS Adjustments
The IRS has updated a variety of other thresholds for 2025:
- Alternative minimum tax (AMT) exemption: $88,100 for single filers and $137,000 for married couples filing jointly.
- Earned income tax credit (EITC): Maximum EITC amount rises to $8,046 for qualifying taxpayers with three or more children.
- Flexible spending account (FSA): The contribution limit increases to $3,300.
For in-depth details regarding the 2025 adjustments, click here.
What Your Employees Should Know
The new tax brackets apply to all earnings starting January 1, 2025. Employees should be provided with the resources necessary to make informed decisions. The IRS offers a tax withholding estimator that helps individuals determine if they have too much federal income tax withheld, which could reduce their take-home pay. Alternatively, it can assist employees with additional income sources in deciding whether to withhold more or make an estimated tax payment to avoid a tax bill. Employees can also submit IRS Form W-4 to their HR or payroll department to ensure the correct federal income tax is being withheld.
What This Means For Business Owners
If you’re a business owner, it’s essential to understand the tax bracket adjustments and standard deductions. Paycheck withholding amounts and quarterly estimated tax payments can affect an employee’s income level subject to a higher tax bracket. Additionally, the following could impact your employees’ decisions:
- Determining how much salary to defer into a traditional 401(k) plan or a health savings account.
- Choosing if they want to participate in a nonqualified deferred income plan (if applicable).
Preparing For The Adjustments
Business owners should take proactive steps to prepare for these changes by:
- Reviewing payroll systems: Ensure your payroll systems are updated to reflect the 2025 tax brackets and standard deductions. This will help avoid discrepancies in employees’ paychecks.
- Communicating with employees: Inform your employees about the changes and how they might impact their take-home pay. Providing resources like the IRS tax withholding estimator can help them make informed decisions.
- Adjusting financial plans: Revisit your business’s financial plans and budgets to account for changes in tax liabilities. This includes reviewing estimated tax payments and potential impacts on cash flow.
- Consulting with tax professionals: Engage with tax advisors to understand the full implications of these changes on your business and to ensure compliance with IRS regulations.
How GMS Can Help With Tax Compliance
Navigating tax changes can be challenging, especially when it comes to payroll compliance. Failing to comply can result in hefty penalty fees. It is estimated that 40% of small businesses pay tax fines of more than $850 annually. GMS offers expert payroll tax management services, ensuring your business complies with the latest IRS updates. From handling payroll deductions to managing employee contributions, our services simplify your tax obligations, helping you focus on growth. Contact us today to learn how we can support your business.