Every year come January 1 you can count on New Year’s resolutions (most of which will probably not work out) and IRS tax changes. Businesses need to know what these changes are to be able to calculate the correct taxable wages for employees, so here are some important changes coming for the year.
Changes to the Wage Base
A taxable wage base is the amount of pay for any given employee that will be subject to taxes during a specific period (usually one calendar year). If you have employees in any of the 14 states that updated their wage base, you may need to make adjustments to withholdings. Those states include Alaska, Hawaii, Idaho, Iowa, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Oregon, Rhode Island, Washington, and Wyoming. If you have employees in Utah, the state adjusts its wage base according to average wages from July 1 to June 30, while the states of Colorado and New Jersey use a state average weekly wage to make adjustments.
The IRS also updated the 2020 federal Social Security wage base limit to $137,700, with a maximum Federal Insurance Contribution Act (FICA) amount increasing to $8,537.40 (6.2% of wage base). Employers are required to match the employee contributions, so employer rates are increasing as well. Medicare wage base limits remain unchanged, and contributions are also unchanged at 1.45%, with an additional 0.9% applied to incomes over $200,000 for single filers and $250,000 for married couples filing jointly.
Unemployment Insurance Changes
Each state calculates their unemployment taxes a little differently, and those that anticipate a shortfall or excess in their unemployment fund have already stated that they may adjust rates partway through the year, so it’s important to stay updated on the current rates to avoid paying too much or too little toward unemployment insurance. Hiring a qualified payroll and tax administration service can help you stay apprised of changes and avoid costly penalties or errors.
Changes to W-4 Withholding Certificates
The IRS released a redesigned Form W-4 to simply the process of calculating the correct withholding amounts for employees. Rather than relying on withholding allowance calculations, the new form provides employees with a series of steps to return income and deduction amounts for a more accurate calculation. Existing employees that have previously filled out a Form W-4 are not required to complete a new one but may want to if they are not having the correct amounts withheld. Any employee who changes his or her withholdings must use the new form. Employees claiming exemption must also fill out a new form each year. The IRS also offers a W-4 tax withholding calculator to help employees estimate the taxes they will owe and ensure they are having enough withheld from each check to avoid owing a lot next April.
Relocation Expenses Reminder
The Tax Cuts and Jobs Act of 2018 changed relocation expenses to be included in an employee’s wages and subject to taxes (relocation for Armed Forces members are still excluded). If you pay for relocation, make sure you know what is required with the changes or talk to a payroll and tax administration service for advice.