As you begin to prepare for the coming year, factor in changes impacting withholding from employees’ wages. As a result, you likely need to change your procedures and make adjustments to your budget for 2020.
Wage Withholding Changes in 2020
Revised Withholding Tables
Due to cost of living adjustments to federal income tax brackets, withholding for all employees change in 2020. State and local income taxes also change for 2020. As a result, they require adjustments to withholding for these tax obligations.
The IRS released a draft of the 2020 withholding tables. Of course, most businesses automate withholding calculations. They use software or outsource to a payroll company or payroll professional. We discuss this in more detail later. So the tables are not needed. They illustrate how things will change.
The IRS has revised Form W-4 (currently in draft) to enable employees to better project their wage withholding needs. Employees who have older versions of the form on file with you are not required to complete a new one, but they can (and probably should to be sure they’re not over- or under-withheld). Employers simply continue to compute withholding based on the information from an employee’s most recently submitted Form W-4.
New Social Security Wage Base
For purposes of the Social Security portion of FICA, the wage base for 2020 is $137,700 (up from $132,900 in 2019). This means that employers will need to withhold additional amounts from employees’ paychecks and pay more for employees in this salary category; budget accordingly. Remember that there’s no wage base for purposes of the Medicare portion of FICA; all taxable compensation is subject to this tax.
New Overtime Rule
A new final federal overtime pay rule takes effect on January 1, 2020. It raises the standard salary level to $685 per week (up from the current $455 per week). Any worker that doesn’t earn more than this level (and is not otherwise exempt from the rule) must be paid time-and-a-half for every hour over 40 hours in the workweek. The new rule is expected to entitle about 1.3 million more workers to overtime pay. Employers need to decide now how to address the new rule. Some options:
- Raise employees’ pay above the standard salary level so they become exempt employees (not subject to the overtime pay rule).
- Reclassify employees as nonexempt and pay overtime when required. If so, be sure the hours for these employees are tracked properly to ensure they’re paid what’s due.
- Budget for overtime for nonexempt employees.
New Minimum Wage Rates
The basic federal minimum wage rate is $7.25 per hour and is not set to increase, although Congress is considering this. (A higher federal rate applies to covered employees of federal contractors, and the rate is increasing to $10.80 per hour for 2020.) A number of states and some localities have higher hourly rates than the federal rate and they take precedence over the federal rate. Starting January 1, 2020, a number of the state and local hourly rates will rise. You can see the rate in your state here.
Salary Reduction Amounts
Be sure to adjust wage withholding to account for various salary reduction amounts that employees agree to. The amounts withheld in 2020 may differ from those in 2019. Pre-tax salary reduction contributions include those for:
- Flexible spending accounts for medical, childcare, and/or adoption
- Contributions to 401(k) or other retirement plans
- Contributions to cafeteria plans (e.g., to pay for the company’s traditional medical insurance on a pre-tax basis)
Small businesses may handle payroll in house or outsource this task to a bookkeeper, accountant, or payroll service. Whichever option is used, be sure to recognize the scope of changes for the coming year, and the additional cost to the company.
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It is important to understand how it works so that you can implement it properly in your business and this is a helpful guide.
Regarding FICA Gross Wages you state, “all taxable compensation is subject to this tax.” but that is somewhat vague as per the federal guidelines it states, “FICA taxes are simple percentages. Calculate FICA withholding using gross wages with no reductions for withholding allowances or pre-tax deductions.”
I was told that contributions to retirements are not to be a reduction to your FICA Gross Wages but that pre-tax health care premiums can be backed out of your Gross Wages for FICA Tax calculation.
So I am confused and would like your professional thoughts on this, are the pre-tax deductions for health care premiums exempt from the FICA tax calculation.