In order to fund Social Security benefits for millions of American citizens, employee wages are taxed up to a certain earnings limit. These taxes ensure that individuals who paid into the system during their working careers can receive Social Security payouts later in life.
The Social Security Administration recently announced changes to the maximum limit on earnings subject to the tax. In early October, the SSA noted that taxable wage cap will increase by more than $4,000, going into effect on Jan. 1, 2020.
What is the new max earnings limit?
This increase in the wage limit for Social Security payroll taxes is nothing new. As Society for Human Resource Management contributor Steven Miller explained, this income cap is automatically adjusted on a yearly basis. In this way, the threshold for Social Security taxable income aligns with average increases to the national wage.
Last year, the average employee wage rose by 3.6 percent. Accordingly, the SSA increased its cap on taxable wages by $4,800, bringing 2019's wage cap of $132,900 up to $137,700 for 2020.
This increased taxable wage cap will help boost the available financial benefits for approximately 69 million people currently receiving Social Security benefits.
"The 1.6% cost-of-living adjustment (COLA) will begin with benefits payable to more than 63 million Social Security beneficiaries in January 2020," the Social Security Administration noted in a news release. "Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2019."
A fact sheet released by the SSA breaks the change down even further. It notes that with taxable income cap increase, an individual under full retirement age follows an earnings exempt amount of $1,520 per month or $18,240 annually in 2020. This is compared to 2019's retirement earnings exempt amounts of $1,470 per month, or $17,640 annually.
Additional tax for Medicare
As Miller pointed out, there are also changes coming to income tax amounts to support Medicare benefits. A provision of the Affordable Care Act requires that employees receiving high compensation will be subject to an additional 0.9 percent tax for Medicare as part of their employee-paid Medicare FICA tax.
Miller explained that whereas the Social Security taxable income cap is adjusted each year based on inflation and the cost of living, this rise in the Medicare tax amount are not subject to inflation-related changes. This means that the increased tax rate impacts more employees every year.
This year's 0.9% threshold increase affects:
- Married couples that file joint taxes and earn more than $250,000.
- Married couples that file separately and make $125,000.
- Single and all other taxpayers earning $200,000.
What these changes mean for internal HR processes
With these and other taxable income changes going into effect next year, it's important that internal company HR teams prepare their systems and educate employees about the adjustments, particularly when they noticeably impact their pay.
"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," Miller wrote.
Company HR leaders should ensure that their payroll software systems correctly account for the increase in taxable wage limits, as well as the higher income thresholds for Medicare tax. HR stakeholders should notify affected employees of the rising payroll withholdings, and be prepared for pushback from workers "who may want to be 'made whole' for their share of the increased tax," Miller advised.
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