2020 IRS Rates and Limits
To assist you in gearing up for the coming year, we have provided updated rates and limits for 2020!
To download a PDF of the guide click here . Read on for more details about the latest rates and regulation changes.
SOCIAL SECURITY AND MEDICARE:
FICA is a combination of Social Security and Medicare taxes.
Employer and Employee rate for Social Security will stay the same at 6.2% on wages to $137,700.
Maximum Social Security withholding is $8,537.40 for 2020.
Both the employee and employer rate for Medicare is 1.45% on all wages. An additional employee Medicare tax for individuals making more than $200,000 per year continues to be in effect for 2020. The employee Medicare tax rate is increased by 0.9% to 2.35% and only applies to employee wages in excess of $200,000.
There is no maximum Medicare withholding.
FEDERAL UNEMPLOYMENT TAX:
The wage limit remains at $7,000 and the NET tax rate with full state credit is 0.6% for 2020.
CALIFORNIA DISABILITY INSURANCE:
State Disability Insurance (SDI) will stay the same at 1.0% for 2020.
Ceiling wage for withholding SDI will change to $122,909 for each employee.
Maximum California SDI withholding is $1,229.09 for 2020.
CALIFORNIA UNEMPLOYMENT INSURANCE:
Wage limit remains at $7,000.
For subject employers, the ETT rate will remain at 0.1%.
The SUI contribution rate varies by employer. You will receive your rate notification in December. Please advise us OR your payroll service of your 2020 rate.
*** CURRENT DEVELOPMENTS ***
California State Minimum Wage: California state minimum hourly wage will increase to $13.00 per hour effective January 1, 2020 for employers with 26 employees or more. For employers of 25 employees or less the minimum wage will increase to $12.00 per hour effective January 1, 2020.
Retirement Test Amounts: Anyone reaching the age of 66 years in 2020 has reached “full retirement age” (FRA), and can earn any amount after that point without affecting their Social Security benefits. Workers who will reach FRA in 2020 can earn $4,050 per month in the months before reaching FRA. Workers who will not reach FRA until after 2020 and are receiving benefits can earn up to $18,240 before benefits are reduced.
Mileage: At this point, the IRS has not yet released its mileage reimbursement rate for 2020. For the time being, we recommend using the 2019 standard mileage rate as a point of reference to estimate what you can expect for 2020. For 2019, the standard mileage rate for computing the value of the business use of an automobile was 58 cents per mile beginning January 1, 2019.
Per Diem rates: Effective from Oct. 1, 2019, to Sept. 30, 2020 the IRS’s high/low per diem rates are as follows, $297/$200 for lodging and $71/$60 for meals and incidentals. For a list of cities that qualify for the high rate, please contact one of our offices.
401(K) Deferrals: The maximum elective deferral amount to 401(k) will increase to $19,500 for 2020. The catch-up limit for additional contributions by employees age 50 or older is $26,000.
Health Savings Accounts: The IRS released the 2020 cost-of-living adjustments for health savings accounts (HSAs) and high-deductible health plans (HDHPs) as follows:
- The 2020 annual HSA contribution limit is $3,550 for individuals with self-only HDHP coverage, and $7,100 for individuals with family HDHP coverage;
- The 2020 minimum annual deductible is $1,400 for self-only HDHP coverage and $2,800 for family HDHP coverage;
- The 2020 limit on out-of-pocket expenses is $6,900 for self-only HDHP coverage and $13,800 for family HDHP coverage;
- The catch-up contribution limit remains at $1,000 for 2020.
California Sales and Use Tax Rate: The statewide sales and use tax rate remains at 7.25%. If you live in a special tax district your rate is 7.25% plus the applicable district tax. The partial sales tax exemption for farm equipment and machinery remains at 5.00%.
IRS 2020 Form W-4: The 2020 Form W-4, Employee’s Withholding Certificate, includes fundamental changes to income tax withholding that will significantly affect both employers and employees. These changes are largely in response to the 2017 Tax Cuts and Jobs Act. Publication 15-T contains all the instructions and tax tables for employers to calculate withholding after 2019, for employees that provide a 2020 Form W-4, and those who have a 2019 or prior Form W-4 on file. Existing employees are not required to complete a 2020 Form W-4; however, after 2019, new hires must use the 2020 Form W-4, and current employees must use the 2020 version if they wish to change their tax withholding. Here are some highlights of the new Form W-4:
- There are three calculation options for employees with multiple jobs or two-earner families;
- There is a new filing status option – Head of Household;
- There are new adjustment entries including full-year child and dependent tax credits, full-year other income, and, full-year deductions.
An employee will still be able to authorize an additional dollar amount to withhold from each pay period.
Assembly Bill 5 (AB-5): On September 18, 2019, AB-5 was signed into law in California. This law becomes effective on January 1, 2020. AB-5 focuses on the misclassification of employees as independent contractors. The law adopts a three-part (ABC) test to determine whether a worker is an employee. According to California’s version of the ABC test, a worker is considered an employee unless the hiring entity established all the following factors:
- The individual is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The individual performs work that is outside the usual course of the hiring entity’s business.
- The individual is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Employers who use independent contractors (IC’s) in California and other states need to evaluate and potentially adjust how they analyze independent contractor status. There are other factors to consider and we recommend consulting with appropriate legal and human resource professionals for assistance.
Fair Labor Standards Act (FLSA) Requirements: Under the final rule to be effective January 1, 2020, the amounts required to be earned by an employee for that employee to be exempt from the FLSA overtime requirements will be $684 per week ($35,568 annually). The new salary level for a Highly Compensated Employee (HCE) will be increased to $107,432 from the current level of $100,000.
Paid Family and Medical Leave Credit: A tax credit is available for employers who provide paid family and medical leave to their employees. Eligible employers may claim the credit, which is equal to a percentage of wages they pay to qualifying employees while they’re on family and medical leave. The credit is generally 12.5% to 25% of paid family and medical leave and is available for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020. Wages paid to qualifying employees as well as other specific criteria must be met to qualify for this employer credit. This tax credit is set to expire on December 31, 2019; however, the Paid Family Leave Pilot Extension Act has been submitted to the Senate, which proposes the credit extends through 2022.
*** ADDITIONAL REMINDERS ***
Threshold for Federal Payroll Tax Deposits: The requirements remain the same, if you owe $2,500 or less in your reporting period (annual for agricultural , quarterly for non-ag ), you are not required to make deposits and may pay the taxes with the return. The threshold for depositing federal unemployment tax (940) also remains the same as last year, i.e. $500 at the end of any quarter.
Deposit Frequency: There is no change for 2020 with regard to the timing of federal payroll tax deposits, though your frequency designation may have changed. Under the current rules, you are either a monthly or a semiweekly depositor based on the level of total taxes paid during the “lookback period.” It is the employer’s responsibility to verify which schedule they should follow. To obtain a recap of the current rules in flowchart format, give us a call. Generally, depositing all withheld SDI and PIT with the EDD using the same schedule required for federal tax deposits will keep you in compliance with state rules.
Independent Contractor Reporting – Form 542: If you will be required to file a 1099-Misc on a sole proprietor, Form 542 still must be reported within 20 days of the earlier of either:
- Entering into a contract which equals or exceeds $600
- When the aggregate payments to an Independent Contractor equal or exceed $600
Business and Agricultural Tax Statements: The State of California requires that every business, upon written request of the Assessor, shall file a written property statement by April 1st of each year. Furthermore, businesses owning taxable personal property having an aggregate cost of $100,000 or more are required to file a statement, whether or not requested by the Assessor. Taxable personal property includes furniture, machinery, equipment and supplies used in the course of business or farming. Licensed vehicles are generally excluded.
W-4’s: If you question the Form W-4 or DE-4 because it meets either of the following two conditions: (1) the employee claims more than 10 withholdings or (2) the employee claims exemption from State or federal income tax withholding and the employee’s usual weekly wages will exceed $200, then you must submit a copy of this form to the Franchise Tax Board. The IRS no longer requires notification. Exempt employees must file a new W-4 with you prior to February 15, 2020. The W-4 Form has been revised for 2020.
New Hires: A reminder when hiring new employees – you must determine employment eligibility under the Immigration Reform and Control Act of 1986. This includes completing Form I-9, Employment Eligibility Verification Form for each new employee hired. Keep the completed I-9 on file with that employee’s W-4. There is no requirement to complete new forms for existing employees; however, employers must use the new form for new hires as well as when their employees require re-verification (see previous discussion on the new 2020 Form W-4). On July 17, 2017 a revised Form I-9 was released. Beginning September 18, 2017, employers are required to use the revised Form I-9 with the July 17, 2017 revision date. All new or rehired employees must be reported to the EDD within 20 days of starting work using Form DE 34. Beginning on January 1, 2014 state legislation defines an individual as a rehire if the employer/employee relationship has ended and the individual has been separated from that same employer for at least 60 consecutive days. Be sure to report these individuals on your Report of New Employee Form DE 34. This requirement is part of a nationwide effort to locate individuals for the purpose of establishing, modifying and enforcing child support obligations.
1099’s: Forms 1099 must be filed by January 31, 2020 for any 2019 payments of $600 or more made to non-corporate entities for rents or services rendered. Form 1099 reporting requirements continue to include payments to incorporated law firms. Attorney’s fees should be reported in box 7, or gross proceeds including attorney’s fees, damage awards, and other payments in box 14. Forms 1099 must also be filed for interest or dividend payments in excess of $10, as well as many other types of payments.
Reimbursements: When making advances or reimbursements to employees for business expenses, be sure that these payments are part of an “accountable plan.” If not, they need to be included as wages to your employee. The basic requirements for an accountable plan are that the expenses (1) have a business purpose, (2) are documented properly, and (3) unspent amounts advanced are returned by the employee. For further details, please contact one of our offices.
California E-file and E-Pay Mandate for Employers: Beginning January 1, 2018, all employers are required to electronically submit employment tax returns, wage reports, and payroll tax deposits to the Employment Development Department (EDD). Any employer required under existing law to electronically submit wage reports and/or electronic funds transfer to the EDD
will remain subject to those requirements.
Qualified Transportation Fringe Benefits: The Tax Cuts and Jobs Act changed the tax treatment associated with employer-sponsored qualified transportation fringe benefit programs, such as programs where employees are provided allowances for parking or other transportation to work. The Act repeals the employer’s deduction for most expenses associated with qualified transportation programs but does preserve the employer’s deduction for expenses necessary for the employee’s safety.
Employee Achievement Award Rules: Under previous law, employers could deduct the cost of certain employee achievement awards. Deductible awards were excluded from employee income. Under new law, there is now a prohibition on cash, gift cards and other non-tangible personal property as employee achievement awards. There are special rules that allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. New law clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater ort sporting events, vacations, meals, lodging, stocks, bonds, securities, and other similar items.
Unsure whether any of these changes affect you or your company’s tax situation? If so, please contact us.
As a reminder, Hayashi Wayland offers payroll services. Handling time and attendance and payroll taxes can be difficult for even the most experienced business leaders. If you would like additional information on how Hayashi Wayland can help you, please contact us.