As we turn the calendar to a new year, we also must understand and ensure compliance with the various new employment laws, including payroll changes, that took effect on January 1, 2020. Here are six changes employers need to know when processing payroll this year.
1. FICA Taxes
FICA, or the Federal Insurance Contributions Act, requires employers to withhold money from employee paychecks to fund Social Security and Medicare. The amount withheld may be listed as a single line item, like FICA, or separated out by the federal program. Even when combined as “FICA”, two separate calculations go into calculating withholding. Here’s what changes in 2020:
Social Security: While the Social Security payroll tax holds at 6.2% in 2020, the taxable wage base (maximum amount of earnings to be taxed on) increases to $137,700 (up from $132,900 in 2019).
Medicare: The Medicare tax is unchanged in 2020 and remains at 1.45%. For those earning more than $200,000 per year, an additional 0.9% surtax applies to the amount earned that exceeds $200,000.
2. Form W-4
Effective in 2020, Form W-4 receives its first major update since the Tax Cuts and Jobs Act was signed into law in December 2017. While filers are only required to fill out the new form if they start a new job or want to make adjustments to their current withholding, there is a clear advantage for additional taxpayers to fill out the new form, too. The sweeping changes to the tax law made it so many Americans saw more take-home pay, but they may have received a smaller refund or owed money when filing their income taxes. Completing the IRS recommended paycheck checkup and filling out the new form can help ensure correct withholding in 2020.
Employers should be aware that employees may find it necessary to look up details from last year’s individual income tax return to determine how to complete the form. As compared to the previous version, the new W-4 will likely require more time for the employee to complete.
Here’s what changes with the new W-4 in 2020:
Allowances Are Gone: The allowances question no longer exists, as it does not align with the new tax law, which eliminated personal exemptions and increased the standard deduction and the child tax credit. Instead, the new W-4 asks how many children and dependents the taxpayer has.
Five-Step Process: The new 2020 form takes a five-step approach, but for those with a simple tax situation, non-applicable questions can be skipped and a standard-deduction can be taken. The five-steps include basic information, dependents, other adjustments, and signature and date.
3. Employee Benefits Contribution Limits
Many pre-tax contribution limits to popular employee benefits accounts increased for 2020.
Here’s what changes in 2020:
401(k): The annual contribution limit increases to $19,500, up $500 from $19,000 in 2019. This also applies to 403(b), most 457 plans and the federal government’s Thrift Savings Plan. The combined employer and employee contribution limit rise by $1,000 to $57,000. For individuals aged 50 and over, catch-up contribution limits increase to $6,500 for 2020, which is up $500 from 2019.
Health Savings Account (HSA): An additional $50 can be contributed for self-only coverage and $100 for family coverage bringing the annual limit on HSA contributions to $3,550 for self-only and $7,100 for family coverage.
Flexible Spending Account (FSA): In 2020, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $2,750, up $50 from 2019. There was no change to the dependent care flexible spending.
Commuter Benefits: Pre-tax contributions to commuter benefits accounts rise to $270 per month in transit passes and $270 per month for parking expenses.
4. Minimum Wage
Across the country in 2020, minimum wage workers in 24 states will see an increase in hourly pay, with 20 states making the increase effective January 1. Of local interest, Missouri raised its minimum wage from $8.60 per hour to $9.45 per hour effective January 1, 2020. The highest minimum wage in the country is currently in Washington, D.C., which will increase to $15 per hour in mid-2020, followed by Washington at $13.50 per hour and California at $13.00 per hour. See the full list of states with increased minimum wage in 2020 here. Always check with your local authorities for the most current rates.
5. New Overtime Rule
On September 24, 2019, the US Department of Labor (DOL) announced its final “overtime rule” which took effect January 1, 2020. The new mandatory overtime pay rule extends overtime pay to an additional 1.3 million U.S. workers. Among its changes, the new rule raises the standard salary level for exempt executive, administrative and professional employees from $455 per week to $684 per week, which is equivalent to $35,568 per year.
6. Leap Year
Happy 2020 … and happy leap year! Every four years we encounter a leap year, which means February has 29 days instead of 28. Does this impact your payroll? Check with your payroll professional for details.
For small business owners, managing payroll while ensuring compliance with state and federal laws can be overwhelming and the cost of non-compliance can be steep. At Axcet HR Solutions, we have more than 30 years of experience helping small and medium-sized businesses with all of their payroll and tax compliance needs.