2019 Payroll Taxes Will Hit Higher Incomes

2019 Payroll Taxes Will Hit Higher Incomes

Wages subject to Social Security FICA rise to $132,900 from $128,400

Stephen Miller, CEBS By Stephen Miller, CEBS October 12, 2018
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updated November 15, 2018

Starting Jan. 1, 2019, the maximum earnings that will be subject to the Social Security payroll tax will increase by $4,500 to $132,900—up from the $128,400 maximum for 2018, the Social Security Administration (SSA) announced Oct. 11.

The taxable wage cap usually is automatically adjusted upward each year based on increases in the national average wage.

About 177 million U.S. wage earners will pay Social Security taxes next year. Among them, nearly 12 million workers who earn above $128,400 will see more of their earnings taxed, according to the SSA.

Payroll Taxes: Cap on Maximum Earnings

Type of Payroll Tax

2019 Maximum Earnings

2018 Maximum Earnings

Social Security

$132,900

$128,400

Medicare

No limit

No limit

Source: Social Security Administration.


FICA Rates

Social Security and Medicare payroll taxes are collected together as the Federal Insurance Contributions Act (FICA) tax. FICA tax rates are statutorily set and can only be changed through new tax legislation.

Social Security is financed by a 12.4 percent payroll tax on wages up to the taxable earnings cap, with half (6.2 percent) paid by workers and the other half paid by employers. Self-employed workers pay the whole 12.4 percent. 

For employers and employees, the Medicare payroll tax rate is a matching 1.45 percent on all earnings (self-employed workers pay the full 2.9 percent), bringing the total Social Security and Medicare payroll withholding rate for employers and employees to 7.65 percent—with only the Social Security portion limited to the taxable maximum amount.

2019 FICA Rate (Social Security + Medicare withholding)
Employee7.65%
(6.2% + 1.45%)
​Employer
​7.65%
(6.2% + 1.45%)
​Self-Employed
​15.3%
(12.4% + 2.9%)
Note: For employed wage earners, their Social Security portion is 6.2% on earnings up to the applicable taxable maximum cap. Their Medicare portion is 1.45% on all earnings.

Additional Medicare Tax

The tax rates shown above do not include an additional 0.9 percent in Medicare taxes paid by highly compensated employees.

Under a provision of the Affordable Care Act, the employee-paid portion of the Medicare FICA tax is subject to the 0.9 percent additional Medicare tax on amounts over statutory thresholds that are not inflation-adjusted and thus apply to more employees each year.

The threshold annual compensation amounts that trigger the additional Medicare tax are:

  • $250,000 for married taxpayers who file jointly.
  • $125,000 for married taxpayers who file separately.
  • $200,000 for single and all other taxpayers.

Additional Medicare tax withholding applies to wages and self-employment income in excess of the thresholds in a calendar year. "These threshold amounts are not indexed for inflation," explains an alert from consultancy Buck Global.

This added tax raises the wage earner's Medicare portion of FICA on compensation above the threshold amounts to 2.35 percent; the employer-paid portion of the Medicare tax on these amounts remains at 1.45 percent.

The additional Medicare tax should not be confused with the alternative minimum tax on high incomes, which does not involve mandatory payroll withholding. To learn more, see the IRS webpage Questions and Answers for the Additional Medicare Tax.


Adjust Systems, Notify Employees

Employees whose compensation exceeds the current $128,400 maximum will see a decrease in net take-home pay if they don't receive an annual raise that makes up for the payroll tax's bigger bite.

By the start of the new year, U.S. employers should:

  • Adjust their payroll systems to account for the higher taxable wage base under the Social Security payroll tax.
  • Notify affected employees that more of their paycheck will be subject to payroll withholding.
  • Take into account the increased taxes that must be paid for affected positions.
  • Expect some pushback from employees who may want to be "made whole" for their share of the extended tax hit.

[SHRM members-only how-to guide: How to Establish Salary Ranges]


Time for 'Paycheck Checkups' to Adjust Withholding

As the year ends, HR departments should remind employees, especially those with children and other dependents, to use the withholding calculator at IRS.gov to do a "paycheck checkup." Changes made by the 2017 Tax Cuts and Jobs Act will affect 2018 returns that taxpayers will file in 2019.

"The law expanded and made significant changes to the child tax credit. It also suspended the deduction for personal exemptions," the IRS noted. "Parents and caregivers should do a 'paycheck checkup' to determine how these changes could affect their 2018 tax situation."

Employees who decide to change their withholding amounts should calculate the appropriate amounts and submit a new Form W-4 to their HR or payroll departments so that paycheck adjustments can be made.

"By adjusting the Form W-4, Employee's Withholding Allowance Certificate, taxpayers can ensure that the right amount is taken out of their pay throughout the year," the IRS advised. "Having the correct amount withheld from paychecks helps to ensure that taxpayers don't pay too much tax during the year—and that  they have money upfront rather than waiting for a bigger refund after filing their tax return."


Social Security Benefits to Increase

Monthly Social Security and Supplemental Security Income benefits for more than 61 million people in the U.S. will increase by 2.8 percent in 2019, the SSA also announced. The Social Security Act ties the annual cost-of-living adjustment (COLA) to increases in the consumer price index, as determined by the Department of Labor's Bureau of Labor Statistics.

According to a new 2019 SSA fact sheet, in January 2018:

  • The maximum Social Security benefit for workers retiring at full retirement age in 2019 will increase to $2,861 per month, up from $2,778.
  • The average Social Security benefit will rise to $1,461 per month, up from $1,422 this year.

The annual Social Security COLA is now based on the increase in the consumer price index for urban wage earners and clerical workers.

The 2.8 percent increase—the biggest jump in seven years—"means an extra $39 per month for the average retired worker and $67 more for a couple receiving benefits," tweeted Juliette Cubanski, associate director at the nonprofit Kaiser Family Foundation. "This increase is above the 2 percent COLA in 2018 and 0.2 percent in 2017," but also reflects the uptick in inflation this year.

Pension Considerations

"These changes will affect benefits for currently retired individuals as well as those contemplating retirement," said Brian Donohue, a partner in the Chicago office of October Three Consulting, a retirement plan advisory firm. "Employers that sponsor defined benefit pension plans that are coordinated with Social Security will also see an impact on benefits earned and payable under such plans," he noted. For example, "a pension formula may provide for 50 percent of an employee's final average pay minus 50 percent of the employee's Social Security benefit. Other formulas provide different levels of benefits based on pay above or below a threshold like the Social Security taxable wage base."

Income Limits for Benefits Earnings Test

The 2019 Social Security cost-of-living adjustment also affects the amount that people who claim Social Security benefits before their full retirement age can earn before seeing a temporary reduction in benefits.

"If you claim early retirement benefits and continue to work, be aware that the money you earn over a certain amount each year may reduce your Social Security retirement benefits (until you reach full retirement age)," wrote attorneys Joseph Matthews and Bethany Laurence at nolo.com. "Such a reduction in benefits applies only to the years you are working. It has no permanent effect on the amount of benefits you'll receive in future years."

The earnings limit for those who claim Social Security benefits before age 66 (for people born in 1943 through 1954) will increase to $17,640 in 2019, up from $17,040 this year. Social Security will withhold $1 in benefits for every $2 in earnings above the limit for workers receiving benefits before their full retirement age.

The earnings limit for people turning 66 in 2019 will increase from $45,360 to $46,920. Social Security will withhold $1 from benefits for each $3 earned over that limit until the month the worker turns 66.

There is no earnings test after workers reach full retirement age. If they continue to work, Social Security will increase their benefits to account for continued withholding, helping to offset amounts that those who claimed early benefits may have lost under the benefits earnings test.



2019 Income Tax Brackets

Income tax bracket adjustments for tax year 2019 were issued in November 2018 by the IRS in Revenue Procedure 2018-57. The level of income that is subject to a higher tax bracket can influence a number of decisions by employees, including how much salary to defer into a traditional 401(k) plan, which reduces taxable income for a given year by the amount contributed, or whether to participate in a nonqualified deferred income plan, if that option is available through the employer.

A comparison of income tax rates and ranges for 2019 and 2018 follows below.
 

Single Filing Individual Return (other than surviving spouses and heads of households)

Tax Rate 2019 Taxable Income 2018 Taxable Income
10%$0 – $9,700
$0 – $9,525
12%
$9,700 – $39,475
$9,525 – $38,700
22%$39,475 – $84,200
$37,700 – $82,500
24%$84,200 – $160,725
$82,500 – $157,500
32%$160,725 – $204,100
$157,500 – $200,000
35%$204,100 – $510,300
$200,000 – $500,000
37%Over $510,300
Over $500,000

 

Married Filing Jointly (and surviving spouse)

Tax Rate 2019 Taxable Income 2018 Taxable Income
10%$0 - $19,400
$0 – $19,050
12%$19,400 – $78,950
$19,050 – $77,400
22%$78,950 – $168,400$77,400 – $165,000
24%$168,400 – $321,450
$165,000 – $315,000
32%$321,450 – $408,200$315,000 – $400,000
35%$408,200 – $612,350
$400,000 – $600,000
37%
Over $612,350
Over $600,000

 

Married Filing Separate Returns

Tax Rate 2019 Taxable Income 2018 Taxable Income
10%$0 – $9,700
$0 – $9,525
12%$9,700 – $39,475
$9,525 – $38,700
22%$39,475 – $84,200
$38,700 – $82,500
24%$84,200 – $160,725$82,500 – $157,500
32%$160,725 – $204,100$157,500 – $200,000
35%$204,100 – $306,175
$200,000 – $300,000
37%
Over $306,175
Over $300,000

 

Heads of Households

Tax Rate 2019 Taxable Income 2018 Taxable Income
10%$0 – $13,850
$0 – $13,600
12%$13,850 – $52,850
$13,600 – $51,800
22%$52,850 – $84,200$51,800 – $82,500
24%$84,200 – $160,700$82,500 – $157,500
32%$160,700 – $204,100$157,500 – $200,000
35%$204,100 – $510,300$200,000 – $500,000
37%Over $510,300
Over $500,000

Revenue Procedure 2018-57 also states that among other income tax adjustments for 2019:

  • The standard deduction for single taxpayers and married taxpayers filing separately rises by $200 to $12,200.
  • The standard deduction for married taxpayers filing joint returns rises by $400 to $24,400.
  • The standard deduction for heads of household rises by $350 to$18,350.


Related SHRM Articles:

IRS Issues New Form W-4 and Updates Tax Withholding Calculator, SHRM Online, March 2018

SSA Revises Payroll Tax Cap for 2018; Tax Law Alters Rates and Brackets, SHRM Online, November 2017

2019 Inflation-Adjusted Limits & Thresholds:

2019 FSA Contribution Cap Rises to $2,700, IRS Belatedly Announces, SHRM Online, November 2018

For 2019, 401(k) Contribution Limit for Employees Rises to $19,000, SHRM Online, November 2018

2019 HSA Limits Rise, IRS Says, SHRM Online, May 2018

ACA's Affordability Threshold Rises in 2019, SHRM Online, May 2018

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