If you have trouble keeping up with payroll-related rules and rate changes, you’re not alone. Contribution limits, wage bases, and tax rates are subject to change every year. And, knowing these changes is paramount to running payroll accurately for your accounting firm or your clients’ businesses.
Read on for a list of common annual payroll changes to help you stay organized (and in turn keep your clients organized).
Five payroll changes that are subject to change annually
Payroll can change at any time (cough, Employee Retention Credit and COVID-19 paid sick and family leave). But in many cases, payroll changes take place at the beginning of a new calendar year.
This is when federal, state, and local governments tend to release updates to anything and everything, particularly:
- 1. Federal income tax tables
- 2. Social Security wage base
- 3. State-specific taxes and contributions
- 4. Benefit limits
- 5. Minimum wage
Whether you send your clients a list of updates each year or want a checklist to help you field questions, here’s what you need to know.
1. Federal income tax tables
Ah, yes, the federal income tax tables and brackets. Following the Tax Cuts and Jobs Act, these tables went through a bit of a makeover.
Now, the federal income tax withholding tables are back to being subject to the regular annual tax rate changes (until new legislation comes around).
Stay up-to-date with federal tax table changes for accurate federal income tax withholding. Generally, the IRS updates the brackets as well as the withholding amounts each year.
2. Social Security wage base
Social Security tax is one of the payroll taxes an employer is responsible for contributing and withholding from employee wages. But, there comes a point when an employer may need to stop contributing and withholding the tax. That’s why knowing the Social Security wage base is so important.
The Social Security wage base is the Social Security tax limit. When an employee earns above the Social Security wage base, the employer stops withholding and contributing the tax. For 2021, the wage base is $142,800.
Generally, the Social Security wage base updates annually. However, there have been some years with the same wage base back-to-back. Stay updated on the annual wage base to ensure compliance.
3. State-specific taxes and contributions (and local too!)
Each year, a number of state-specific taxes and/or contribution rates are subject to change, including:
- State income tax
- SUTA tax rates and wage bases
- Paid family leave (PFL)
- Paid sick leave
- Other state-specific programs
In addition to federal income tax, most states also have a state income tax. Each state determines its state income tax.
SUTA tax, or State Unemployment Tax Act tax, is the tax rate employers (and employees in some states) pay on their employees’ wages, up to a limit. Updating payroll with new SUTA tax rates and wage bases (which your client should receive from their state) is key to compliance.
States with paid family leave programs require employers to withhold, contribute, or withhold and contribute money from employee wages to fund the PFL program. Generally, this is a percentage of the employee’s wages, up to a certain amount. These percentages and limits can change annually.
States with paid sick leave laws require qualifying employers to offer eligible employees paid sick leave. The state decides the minimum amount of sick hours an employee can accrue per year, along with the accrual rate. These accrual rates and hours may be subject to change annually.
And, there are a number of other, more obscure state programs with rates that could fluctuate annually, such as:
- Oregon’s transit tax
- Massachusetts’ EMAC tax
Last but not least: taxes and contributions by locality. From local income tax to school district tax, there are a number of local taxes and rates to keep your eye on, too.
4. Benefit limits
Offering benefits is a great way for your clients to retain their employees and boost their employer brand. But with great benefits come great contribution limits.
There are a number of benefit types with set contribution limits, including:
- FSA and HSA (flexible spending accounts and health savings accounts, respectively)
- Retirement plans
- Commuter benefits (transportation and parking expenses)
- Per diem
- Mileage reimbursement
Generally, your clients work with providers to offer these benefits. And, these providers typically issue information on plan changes, including annual contribution limits.
5. Minimum wage
The federal minimum wage hasn’t changed since 2009 (but that may change soon-ish). But, many states with a state minimum wage update their rates annually.
Have clients and their employees all in one state? Then your focus is on that state’s minimum wage law. But if you have clients in multiple states, you’ll need to keep tabs on those states’ minimum wage laws each year.
Some states follow a minimum wage increase schedule. This schedule increases the minimum wage each year until the state reaches $15.00 per hour.
If your client is in a locality with a local minimum wage, you also need to monitor these potential changes.
Ready for an easier way to handle payroll?
Some accountants shy away from offering payroll services. And can you blame them? Payroll-related rules and rates change. All. The. Time.
Thankfully, cloud-based payroll software automatically updates with new contribution limits, wage bases, and tax rates. With payroll software, you don’t have to worry about remembering to update your process before running your clients’ payroll—the changes are already there.