Home Taxes Payroll and Taxes: 3 Things to Remind Employees Of

Payroll and Taxes: 3 Things to Remind Employees Of

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Payroll and taxes are pretty dry subjects that do not get much discussion around the dinner table. At the same time, employees would be better off knowing a bit more about both. Any amount of additional knowledge is helpful in the sense that it empowers employees to make wiser financial decisions.

If your company makes a concerted effort to educate employees about payroll and taxes, good for you. Below are three things you can remind your employers of in the coming months. All three relate directly to how much they take home with every paycheck.

1. Withholding and the New W-4

The W-4 form affects nearly every employee, so this is where we will start. Remember that the new W-4 became official as of January 1, 2020. All new hires first paid after January 1 must have completed and submitted the new form. All other employees can voluntary complete the new form if they so choose.

Employers still use the same tax withholding tables to determine how much to withhold from each paycheck. However, the new W-4 form eliminates personal exemptions. This could be problematic for workers who do not understand how the new form works. A lack of understanding could mean an employee has too little withheld and winds up with a tax bill the next spring.

Employers can, and should, educate their employees about the new W-4 form. They can also point them to the IRS website where consumers can find a helpful, online tool that will tell them how much to have withheld based on their individual circumstances.

2. Higher Social Security Wage Base

Moving on, the Social Security wage base has increased for 2020. The wage base for Social Security taxes was $132,900 last year. It rises to $137,700 for 2020. What does that mean? Dallas-based BenefitMall, a nationwide provider of benefits administration and payroll services, explains it this way: the Social Security wage base is the maximum amount of annual earnings subject to Social Security tax.

The Social Security tax rate is 12.4%. It is split evenly between employer and employee, with each one paying 6.2%. Under the new wage base, employee wages are only subject to the tax up to $137,700. Any wages in excess of that amount are not subject to Social Security tax. For employees, that means an extra 6.2% in their weekly paychecks.

3. Higher Retirement Plan Contributions

Companies offering 401(k) plans should inform employees that they can contribute more this year. Employees can now contribute up to $19,500 to their 401(k) plans via withholding. That is an increase of $500 from 2019. But wait, it gets better.

When you combine both employee and employer contributions, the maximum amount for 2020 is $57,000. That is up to $1,000 from 2019. Larger contribution amounts translate to less money in an employee’s paycheck, but that is not necessarily a bad thing. Contributing more now means having more to live on in retirement.

One final point about 401(k) plans is the fact that they are tax-deferred. In other words, contributions are made with pretax dollars. Employees do not pay income tax on those contributions in the year they are earned. They will, however, pay taxes on future withdrawals. That makes the 401(k) a tax-deferred plan rather than tax-free.

While there are some tax changes that affect payroll for 2020, this year will be fairly benign compared to some past years. This would be a good year for companies to make plans for educating their employees about payroll and taxes. The more employees know about such things, the better off they are.

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