09 Jan 2021 Payroll Updates

Out with the old, in with the new! It’s that time of year folks, the latest and greatest in the world of payroll. We’re going to take a look at some updates that may have an impact on your paycheck.

Social Security and Medicare

The social security wage base limit will increase to $142,800, which means that is the maximum amount of wages an employee and an employer will each pay social security taxes on. The social security tax rate will remain at 6.2%. Therefore, the maximum social security tax an employee and an employer will each pay is $8,853.60.

There is no limit on the amount of wages subject to the Medicare tax and the wages are taxed at 1.45%. Wages exceeding $200,000 are subject to an additional 0.9% tax.

For the self-employed folks, the social security wage base limit will be $142,800 as well. The combined self-employment tax will be 15.3% which breaks down to 12.4% for social security and 2.9% for Medicare. The maximum social security tax paid will be $17,707.20 and there is no limit on the income subject to the Medicare tax.

Supplemental Tax Rate

The supplemental tax rate for wages up to $1 million will remain at 22%. Supplemental wages are payments made to an employee in addition to regular wages. Some examples are bonuses, commissions, severance pay, and vacation payouts when terminating employment. Supplemental wages can be issued as a separate payment or it can be included with your regular wages. If an employee receives supplemental wage payments in excess of $1 million in a calendar year, the excess amount will be subject to a 37% tax rate.

Federal Withholding Tax Exemption

If you claimed exempt from Federal income taxes in 2020, the exemption will expire on February 16, 2021. To continue the exemption, you will need to submit a new W-4 form. If a new form isn’t submitted, your employer can begin withholding at the Single or Married filing separately tax rate.

Federal Withholding Tax

In December, the IRS released Publication 15-T with the updated tax tables for 2021. The income limits for all tax brackets have been increased due to inflation. To ensure the correct amount of taxes are being deducted from your paycheck, you can utilize the Tax Withholding Estimator found on the IRS website. The results generated can be used as a guide to assist you in updating your W-4 tax information.

Complete your due diligence and ensure you are up to date on the items that could possibly impact your paycheck in the new year!