The tax code is complicated and constantly changing. Employers would be wise to study changes in payroll taxes for 2020 to help maintain compliance, identify tax advantages and avoid costly penalties. Here’s what your business needs to know about four important changes to payroll in 2020.
1. Old-Age, Survivors and Disability Income Insurance (OASDI)
The OASDI taxable wage base is increasing to $137,700 in 2020 (up from $132,900 in 2019), according to the Social Security Administration. That means the maximum OASDI employee contribution is $8,537.40, which is 6.2% of the wage base. Employers are required to match employee OASDI contributions. What is OASDI? It’s the portion of the FICA (Federal Insurance Compensation Act) tax that’s earmarked for the Social Security program. In fact, it’s commonly referred to simply as “Social Security.” The federal government uses Social Security taxes to fund benefits for retirees, their surviving spouses, and dependents and people with disabilities. Medicare is one of those benefits. Essentially, 12.4% of taxable employee wages are paid into OASDI (Social Security). Half of that is paid by the employee. The other half is paid by the employer, so each pays a 6.2% share. Thus, if an employee earns $50,000, the total OASDI tax owed is $6,200 (12.4%) and the employee and employer must each pay $3,100 (6.2%). The 2020 social security tax change increases the maximum employee contribution, which effectively increases the maximum employer contribution as well (since employers must match employee contributions). It’s important to track employee income and properly categorize compensation to help you maintain compliance and avoid overpaying OASDI taxes.
The Medicare portion of the FICA tax has no wage base for the employee share. All taxable income requires a 1.45% contribution rate up to $200,000. An additional 0.9% is applied to employees who earn more than $200,000, so high income employees are taxed at 2.35%. Again, employers must match employee contributions to the FICA tax, including the Medicare portion. The $200,000 threshold underscores the importance of proper employee classification, accurate employee time keeping and correct compensation categorization. This doesn’t mean you should try to game the system to reduce tax liability (that can land you in legal hot water); however, it does illustrate how employers have the potential to save money when they implement systems that enable accurate reporting. Even a small time keeping, misclassification or accounting error could cost your company thousands.
3. Health Savings Accounts (HSA)
HSA limits for 2020 are increasing to $3,550 for individual coverage (up from $3,500) and to $7,100 for family coverage (up from $7,000). Deductibles for HSA-eligible, high-deductible health plans must be at least $1,400 for individual coverage and $2,800 for family coverage. What does this mean for your business? As an employer, you can make tax deductible contributions to your employees’ Health Savings Accounts. Doing so can help reduce your overall payroll and FICA tax liabilities. The new HSA limits also serve as a reminder that you should make sure all employee paycheck deductions are accurate. Meticulous reporting is critical to gaining the best possible tax advantages.
4. Retirement savings plans
Contribution limits for 401k, 403b and 457 plans are increasing to $19,500 in 2020 (up from $19,000 in 2019). The catch-up contribution limit for participants age 50 and older is increasing from $6,000 to $6,500. Simple plan contribution limits are increasing from $13,000 to $13,500. The catch-up contribution limit will remain at $3,000. Like HSAs, employer contributions to qualified retirement plans are tax deductible. The new limit increases mean you can contribute more to employee retirement plans and potentially save on payroll and FICA taxes. Don’t have a plan? It might be worth exploring one, especially since tax credits and other incentives might be available to your business if you do.
How to comply with changes in payroll taxes for 2020
Changes to payroll in 2020 mean changes for your business. Start by familiarizing yourself and/or your HR and payroll staff with the updated tax code. Make sure employees are properly classified and their time is accurately tracked, that compensation is categorized correctly and that deductions are applied accordingly. Develop a system to accurately track and report on payroll so you can limit your tax liabilities, maximize tax credits and deductions, and avoid potentially costly penalties and fines. Admittedly, payroll taxes can be an enormous undertaking for employers both large and small. You have a business to run, after all, and dealing with changes in payroll taxes can distract you from critical daily operations. An in-house team can be expensive to staff and train every single time rules are changed (which is frequently — sometimes the tax code can even change more than once a year). The tax code is complicated and creates plenty of opportunities for errors, missed deductions and inaccuracies that can cost your business money. That’s why many companies outsource to experienced payroll service providers who are well-versed in the tax code. Deluxe Payroll can help. Deluxe Payroll offers a full suite of payroll, tax filing and HR compliance services designed to help you maintain compliance with the tax code, file taxes, make deposits accurately and on time, and ultimately limit your overall tax liability.
Editor's note: This blog post was deemed accurate at the time of publication and may not reflect recent changes related to payroll law. The information provided in this blog does not, and is not intended to, constitute legal or financial advice.
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