As we embark upon 2020, numerous payroll changes await. Among them are FICA taxes, Form W-4, state taxes, employee benefits, minimum wage, overtime, paid sick leave, and the quadrennial leap year.
FICA Taxes
Social Security tax
For 2020, employers and employees must each pay Social Security tax at 6.2%, up to the taxable wage base of $137,700 — increasing from $132,900 in 2019.
Medicare tax
For 2020, employers and employees must each pay Medicare tax at 1.45% of all taxable wages, unchanged from 2019. Additional Medicare tax on wages over $200,000 remains at 0.9%.
Form W-4
IRS Form W-4 is changing to facilitate adjustments made by the 2017 Tax Cuts and Jobs Act.
In August 2019, the IRS unveiled its second draft of the new (2020) Form W-4. Essentially, the 2020 form skips the “allowances” concept, instead taking a five-step approach that includes:
- Basic information, such as name, Social Security number, and filing status
- Multiple jobs or spouse works
- Claim dependents
- Other adjustments
- Sign and date
Employers should have their employees review the 2020 Form W-4 (once finalized) and submit federal income tax withholding changes for 2020 on the new form. Employees do not have to fill out a new W-4 if they have no changes for 2020; their 2019 W-4 will suffice.
Per the IRS, employees should use the agency’s Tax Withholding Estimator to perform a “paycheck checkup” and to ensure the right amount of federal income tax is withheld from their wages.
Note that in November 2019, the IRS released its third draft of Publication 15-T, Federal Income Tax Withholding Methods, which breaks down how employers should withhold federal income tax based on employees’ 2020 Form W-4.
State and Local Taxes
Employers will need to stay on top of state and local payroll tax changes for 2020. Requirements vary by location, but may include:
- State income tax
- Local taxes, such as city and county taxes
- State unemployment tax
- State disability insurance
- Employment training tax
Employees can use an online paycheck calculator to gauge the effect of federal, state, and local payroll taxes on their take-home pay.
Employee Benefits Limits for 2020
401(k):
- Maximum employee contributions = $19,500
- Employee catch-up contributions (age 50 or older) = $6,500
- Maximum contributions from all sources (employee + employer) = $57,000
- Maximum contributions from all sources (age 50 or older) = $63,500
Health Savings Account (employer + employee limits):
- Self-only coverage = $3,550
- Family coverage = $7,100
- Employee catch-up contributions (age 55 or older) = $1,000
Health Flexible Spending Account:
- Maximum pretax salary deferral = $2,750
Qualified Small Employer Reimbursement Arrangement:
- Maximum payment/reimbursement for self-only coverage = $5,250
- Maximum payment/reimbursement for family coverage = $10,600
Pretax Transportation Benefits:
- Transit passes and vanpool = $270 monthly
- Parking = $270 monthly
Minimum Wage
Many states and localities have their own minimum wage; in most cases, the rate is tied to annual increases based on the Consumer Price Index (CPI).
Over 20 states are expected to undergo minimum wage hikes in 2020. These include Arizona, California, Florida, Illinois, Maine, Michigan, New York, Ohio, and Washington.
When both federal and state minimum wage apply, employees must receive the higher standard.
New Federal Overtime Rule
On Sept. 27, 2019, the U.S. Department of Labor issued a final rule, raising the salary threshold for exempt executive, administrative, and professional employees from $455 per week to $684 per week. The final rule is effective Jan. 1, 2020.
Basically, to keep being exempt from overtime under federal law, salaried-exempt employees must receive no less than $684 per week. They will be eligible for overtime if they receive less than that amount.
A few states, including California and Maine, have overtime exemption laws, which may entail changes for 2020.
Paid Sick Leave
Currently, 11 states plus an increasing number of cities and counties require employers to provide paid sick leave.
Employers should keep an eye out for new or updated paid sick leave regulations impacting their jurisdiction in 2020. For example, Duluth, Minnesota’s paid sick leave law kicks in Jan. 1, 2020.
Leap Year
During a leap year — which happens roughly every four years — February has 29 days instead of 28 days. This may cause an extra payday for the year, depending on employees’ pay frequency and when their actual payday occurs.
Since 2020 is a leap year, impacted employers should promptly determine the best way to handle the extra payday. Also crucial is communicating related paycheck changes to employees in a timely manner.
