Have you recovered from the electoral drama yet?
Allow me to quickly remind you: No matter how you’re feeling about these results, what matters MOST is how you operate that which is under YOUR control.
And I say that as somebody whose entire work is driven by decisions made by Congress and the IRS.
So, let’s keep on truckin’ towards our goals, and keep this stuff where it belongs – as background noise.
You’ve been faced with a lot of changes the past year… two years – ok, three years. I have to take a second to really commend you on your resilience in these times. As a business owner, being able to take a few hard-landing punches and still stay in the fight takes grit.
So as the year hurtles towards its end, that means thinking about the last moves you can make to see those goals you had get checked off your list.
Now, speaking of one of those changes, you may have to help your employees navigate a change that’s coming to social security payroll taxes starting 1/1/2023…
Changes to Your Business’s Social Security Payroll Taxes
“It’s not the load that breaks you down, it’s the way you carry it.” – Lou Holtz
You may have heard about the recent increases coming to Social Security benefits: the biggest hike in decades. Seems inflation’s getting into everything, including taxes for your employees.
Starting next year, your workers will have to earn more before they’re exempt from having Social Security taxes taken out of their paycheck.
Here’s what to know about the changes to social security payroll taxes.
The up and up
Most people have heard by now that Social Security recently gave benefits recipients the biggest cost-of-living adjustment (COLA) since 1981 – good news for a lot of folks fighting inflation. But increases were also reflected in another Social Security formula, this one affecting your company.
Starting next year, the base annual wage for computing Social Security tax will increase to $160,200 – up from $147,000 for 2022. Wages and self-employment income above this threshold won’t be subject to Social Security tax.
As a reminder, employers, employees, and self-employed workers have to deal with two taxes from the Federal Insurance Contributions Act (FICA): Social Security (aka the old age, survivors, and disability insurance taxes), and Medicare (the “hospital insurance” tax). For almost a century now, FICA has partly funded Social Security programs. Social Security benefits recently bumped with the big COLA are funded from the general tax base, not specifically by FICA payments. Medicare was added to paycheck withholdings in the 1960s.
The Social Security tax has a maximum; the Medicare tax doesn’t. For 2023, the FICA tax rate for employers remains the same as this year: 7.65%, broken down into 6.2% for Social Security and 1.45% for Medicare. That makes your workers’ maximum Social Security tax $9,932.40 for 2023.
If you’re self-employed (SE), your Social Security tax of the full 12.4% on the first $160,200 of SE income translates into a maximum for 2023 of $19,864.80.
Just to review… You withhold a 6.2% Social Security tax from your employees’ wages and you pay an additional 6.2% (your “employer share”) – which combined makes the full 12.4%. You as an employer also withhold a 1.45% Medicare tax from your employee’s wages, and you pay an additional 1.45% employer share for a total of 2.9%.
As an employer, you do not pay a portion of the 0.9% Medicare surtax (aka the Additional Medicare Tax) for your high-earning workers ($200,000, for instance, for an employee who files his or her taxes using the status of Single), though you do withhold this amount when employees hit that pay threshold. And once you begin withholding that surtax, you withhold it every pay period until the end of the calendar year.
A few questions about social security payroll taxes
Compliance with FICA and employer’s taxes is nothing to fool with. Here are some good questions to ask yourself before the calendar flips.
Does one of my employees also have other jobs? Not an uncommon situation these days. You might want to check this with your workers.
Each employer must withhold Social Security taxes from that person’s wages even if the combined withholding exceeds the yearly limit. (When they file their tax return the following year, the employee can seek a credit for the extra that was paid in.)
What if my employees make tips? Employees who get 20 bucks or more in tips in a calendar month should be reporting them to you the following month. You’re responsible for withholding employee income tax and the employee’s share of FICA taxes and paying the employer’s share.
There is an FICA tip credit you might get against the income taxes for FICA taxes paid on certain tip wages.
What’s “Medicare mismatch?” This applies to that 0.9% Medicare withholding for high earners on your staff. You’re obligated to withhold that amount (but again, not pay an equal share) regardless of whether your employee will owe the surtax depending on their filing status and what their spouse makes if they’re married (and, for that matter, whether their spouse also works for your company).
If misunderstood, this can make for over- or under-withholdings.
How do I keep track of the changes? Your payroll software should automatically update a change this significant. Now’s the time for you to make sure, while there’s still some 2022 left.
Now changes like these can have you sitting back and wondering what to do to absorb them and work with them.
That’s why I write this blog to you. One thing you can count on is “changes” regardless of who controls Congress.
BE THE ROAR not the echo®