2020 Payroll Taxes Will Hit Higher Incomes
Wages subject to Social Security FICA taxes will rise to $137,700 from $132,900
Editor's note: To read about 2021 payroll taxes and the adjustment in the Social Security earnings cap, see the SHRM Online article 2021 Wage Cap Rises Modestly for Social Security Payroll Taxes. |
Update: Some Payroll Taxes Suspended Due to COVID-19 Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020 and implemented through IRS Notice 2020-22 and a series of IRS FAQs, allows eligible employers to defer the deposit and payment of the employer's share of Social Security FICA taxes for the period beginning March 27, 2020 through Dec. 31, 2020. The deferred payments must subsequently be paid to the Treasury Department, with half due by Dec. 31, 2021, and the other half by Dec. 31, 2022. On Aug. 28, the IRS issued Notice 2020-65, allowing employers to suspend withholding and paying to the IRS eligible employees' Social Security payroll taxes, as part of COVID-19 relief. The payroll tax "holiday," or suspension period, runs from Sept. 1 through Dec. 31, 2020, and applies only to employees whose wages are less than $4,000 for a biweekly pay period, including salaried workers earning less than $104,000 per year. Companies that suspend collection of employees' payroll tax would collect additional amounts from workers' paychecks from Jan. 1 through April 30 2021 to repay the tax obligation. See the SHRM Online article IRS Guidance Allow Workers a Payroll Tax 'Holiday.' |
The article below was last revised on Nov. 7, 2019.
Starting Jan. 1, 2020, the maximum earnings subject to the Social Security payroll tax will increase by $4,800 to $137,700—up from the $132,900 maximum for 2019, the Social Security Administration (SSA) announced Oct. 10. The SSA also posted a fact sheet summarizing the 2020 changes.
The taxable wage cap is subject to automatic adjustment each year based on increases in the national average wage, which last year rose by 3.6 percent.
Additionally, the SSA announced that Social Security benefits for nearly 69 million Americans will increase 1.6 percent in 2020. The cost of living adjustment is based on the annual increase in the consumer price index through the third quarter of 2019.
About 178 million U.S. wage earners paid Social Security taxes this year. Roughly 6 percent of workers earn more than the current taxable maximum, according to the SSA.
Payroll Taxes: Cap on Maximum Earnings | ||
Type of Payroll Tax | 2020 Maximum Earnings | 2019 Maximum Earnings |
Social Security | $137,700 | $132,900 |
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 law.
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 entire 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.
| FICA Rate (Social Security + Medicare Withholding) | |
| Employee | 7.65% (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. | |
Adjust Systems, Notify Employees
Employees whose compensation exceeds the 2019 maximum of $132,900 will see a decrease in net take-home pay if they don't receive an annual raise to compensate 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 pay 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 increased tax.
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.
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.
[SHRM members-only how-to guide: How to Establish Salary Ranges]
Social Security Earnings Test Limits
The SSA also announced upward adjustments in the Social Security earnings test limit. For those who collect Social Security retirement benefits before reaching their full retirement age, benefits are reduced by $1 for every $2 they earn over the earnings limit.
- For 2020, the earnings limit for workers who are younger than full retirement age (age 66 for people born in 1943 through 1954) will increase to $18,240 per year (meaning SSA deducts $1 from benefits for each $2 earned over $18,240), up from $17,640 in 2019.
- The earnings limit for people turning 66 in 2020 will increase to $48,600 (SSA deducts $1 from benefits for each $3 earned over $48,600 until the month the worker turns age 66), up from $46,920 in 2019.
There is no limit on earnings for workers who have reach or passed their full retirement age for the entire year.
'Paycheck Checkups' to Adjust Withholding
As the year ends, HR departments should remind employees, especially those with children and other dependents, to use the Tax Withholding Estimator on the IRS website to do a "paycheck checkup." It's especially important to use the estimator now if an employee:
- Incurred an unexpected tax bill or a penalty when filing this year.
- Has or will experience a change in marital status, dependents, income or jobs this year.
Employees who decide to change their withholding amounts should calculate the appropriate amounts, enter them on Form W-4, and submit the form to their HR or payroll departments so that paycheck adjustments can be made.
Employees can submit the current 2019 Form W-4 through the end of the year or wait until the new 2020 Form W-4 is finalized and released, likely in November. The new form is expected to include major revisions designed to make accurate income-tax withholding easier for employees.
By adjusting their withholding amounts, "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."
HSA Contributions
HSA Salary-Deferred Contributions Exempt from Payroll Taxes Among employees' common misperceptions about health savings accounts (HSAs) is a lack of awareness that payroll-deferred HSA contributions are not subject to Social Security and Medicare (FICA), and federal unemployment (FUTA) taxes. In other words, when employees contribute to their HSA through a payroll deduction, the money is excluded from federal income taxes and FICA/FUTA taxes. Only two states—California and New Jersey—tax employer and employee HSA contributions at the state level. In addition, HSA funds withdrawn for qualified medical expenses are not treated as taxable income. In comparison, with a traditional 401(k), no income taxes are deducted on employees' payroll-deferred contributions, although FICA and FUTA taxes will be taken from amounts deferred; income taxes are then owed on withdrawals made during retirement. For a Roth 401(k), FICA/FUTA and income taxes are deducted from contributions, while withdrawals during retirement are tax free. Benefit managers may want to highlight the unique tax advantage given to HSAs in open enrollment communications about HSA-eligible health plans. |
Some Pensions Affected
Employers that sponsor defined benefit pension plans that are coordinated with Social Security could see an impact on earned and payable plan benefits due to the 2020 Social Security adjustments, said Brian Donohue, a partner in the Chicago office of October Three Consulting, a retirement plan advisory firm. 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," he explained, while "other formulas provide different levels of benefits based on pay above or below a threshold like the Social Security taxable wage base."
2020 Income Tax Brackets
The IRS issued income tax bracket adjustments for tax year 2020 in Revenue Procedure 2019-44, released on Nov. 6.
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 or into a health savings account, 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 2020 and 2019 follows below.
Single Filing Individual Return (other than surviving spouses and heads of households)
| Tax Rate | 2019 Taxable Income | 2020 Taxable Income |
| 10% | $0 – $9,700 | $0 – $9,875 |
| 12% | $9,700 – $39,475 | $9,875 – $40,125 |
| 22% | $39,475 – $84,200 | $40,125 – $85,525 |
| 24% | $84,200 – $160,725 | $85,525 – $163,300 |
| 32% | $160,725 – $204,100 | $163,300 – $207,350 |
| 35% | $204,100 – $510,300 | $207,350 – $518,400 |
| 37% | Over $510,300 | Over $518,400 |
Married Filing Jointly (and surviving spouse)
| Tax Rate | 2019 Taxable Income | 2020 Taxable Income |
| 10% | $0 - $19,400 | $0 – $19,750 |
| 12% | $19,400 – $78,950 | $19,750 – $80,250 |
| 22% | $78,950 – $168,400 | $80,250 – $171,050 |
| 24% | $168,400 – $321,450 | $171,050 – $326,600 |
| 32% | $321,450 – $408,200 | $326,600 – $414,700 |
| 35% | $408,200 – $612,350 | $414,700 – $622,050 |
| 37% | Over $612,350 | Over $622,050 |
Married Filing Separate Returns
| Tax Rate | 2019 Taxable Income | 2020 Taxable Income |
| 10% | $0 – $9,700 | $0 – $9,875 |
| 12% | $9,700 – $39,475 | $9,875 – $40,125 |
| 22% | $39,475 – $84,200 | $40,125 – $85,525 |
| 24% | $84,200 – $160,725 | $85,525 – $163,300 |
| 32% | $160,725 – $204,100 | $163,300 – $207,350 |
| 35% | $204,100 – $306,175 | $207,350 – $311,025 |
| 37% | Over $306,175 | Over $311,025 |
Heads of Households
| Tax Rate | 2019 Taxable Income | 2020 Taxable Income |
| 10% | $0 – $13,850 | $0 – $14,100 |
| 12% | $13,850 – $52,850 | $14,100 – $53,700 |
| 22% | $52,850 – $84,200 | $53,700 – $85,500 |
| 24% | $84,200 – $160,700 | $85,500 – $163,300 |
| 32% | $160,700 – $204,100 | $163,300 – $207,350 |
| 35% | $204,100 – $510,300 | $207,350 – $518,400 |
| 37% | Over $510,300 | Over $518,400 |
Revenue Procedure 2019-44 also states that among other income tax adjustments for 2020:
- The standard deduction for single taxpayers and for married taxpayers filing separately rises by $200 to $12,400.
- The standard deduction for married taxpayers filing joint returns rises by $400 to $24,800.
- The standard deduction for heads of household rises by $300 to $18,650.
Other 2020 Inflation-Adjusted Limits/Thresholds
401(k) Contribution Limit Rises to $19,500 in 2020, SHRM Online, November 2019
2020 FSA Contribution Cap Rises to $2,750, SHRM Online, November 2019
2020 Payroll Taxes Will Hit Higher Incomes, SHRM Online, October 2019
PBGC Raises Pension Premium Rates for 2020, SHRM Online, October 2019
2020 HSA Limits Rise Modestly, IRS Says, SHRM Online, May 2019
IRS Lowers Employer Health Plans' 2020 Affordability Threshold, SHRM Online, July 2019
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