Prices in the US are soaring. In fact, in 2022, prices increased faster than they ever did in the last 40 years. Fortunately, the federal government has announced some individual payroll tax adjustments for the year 2023, which may help alleviate the effects of high inflation to some extent. The federal government announces these payroll tax changes — mainly concerning wage caps, income tax brackets, and non-taxable contributions — every year to adjust to economic conditions. Read to the end for our downloadable Payroll Tax Changes Checklist for 2023.
As an employer, it’s your responsibility to keep up with these changes and tweak your payroll to remain compliant — and avoid hefty penalties. In 2023, you must account for the following 4 major payroll tax changes.
1. Social Security Wage Base Increases by Nearly 9%
The social security wage base — the maximum income subject to social security tax — will increase from $147,000 to $160,200 starting January 1, 2023. This increase will reflect a nearly 9% jump. The Social Security Administration (SSA) announced this change in taxable income in October 2022 to adjust to the increase in national average wages. Consequently, social security benefits will increase by more than $140 per month.
While this is great news for social security beneficiaries, high-income earners (i.e., those whose income exceeds $147,000) will take home smaller paychecks.
The 6.2% social security tax rate — the larger part of the Federal Insurance Contributions Act (FICA) rate of 7.65% — will remain unchanged. At most, a person will pay $9,932.40 ($160,200 x 6.2%) in social security tax in 2023.
Medicare taxes will continue not to have a maximum wage cap, and the withholding rate of 1.45% (for both the employees and the employers) will remain unchanged. Therefore, employees that climb the taxable income brackets in 2023 will have to pay more. Furthermore, an employee whose taxable income exceeds $200,000 will continue to pay an additional Medicare tax of 0.9%.
How You Should Prepare for this Change
If you’re an employer, you must first communicate the new wage cap for social security taxes to every employee on your payroll, regardless of how much they earn. Ideally, this should be done before they get their first paychecks of 2023. The HR department can do this with a company-wide memo.
Invite your employees to ask questions via email or through an informative session about how this will affect their pay, so they can start planning ahead.
Next, proactively update your payroll system to reflect the higher wage cap for the social security tax. Speak to your service provider about this change if you don’t do payroll internally to ensure they’re up-to-date. For instance, Inova HCM will automatically adjust calculations based on these changes.
2. Federal Income Tax Bracket Thresholds Increase by Almost 7%
The federal government helps taxpayers adjust to inflation by raising income tax bracket thresholds — the income ranges tied to the different tax rates. For 2023, the IRS has decided to increase the federal tax thresholds by almost 7% for every bracket.
Here are the highlights of how the income tax brackets have changed for single-filers and joint-filers (source: IRS).
|Tax Rates||2023 Taxable Income Brackets||2022 Taxable Income Brackets|
|10%||$0 to $11,000 ($0 to $22,000 for married couples who file jointly)||$0 to $10,275 ($0 to $20,550 for married couples who file jointly)|
|12%||Above $11,000 to $44,725 (above $22,000 to $89,450 for married couples who file jointly)||Above $10,275 to $41,775 (above $20,550 to $83,550 for married couples who file jointly)|
|22%||Above $44,725 to $95,375 (above $89,450 to $190,750 for married couples who file jointly)||Above $41,775 to $89,075 (above $83,550 to $178,150 for married couples who file jointly)|
|24%||Above $95,375 to $182,100 (above $190,750 to $364,200 for married couples who file jointly)||Above $89,075 to $170,050 (above $178,150 to $340,100 for married couples who file jointly)|
|32%||Above $182,100 to $231,250 (above $364,200 to $462,500 for married couples who file jointly)||Above $170,050 to $215,950 (above $340,100 to $431,900 for married couples who file jointly)|
|35%||Above $231,250 to $578,125 (above $462,500 to $693,750 for married couples who file jointly)||Above $215,950 to $539,900 (above $431,900 to $647,850 for married couples who file jointly)|
|37%||Above $578,125 (above $693,750 for married couples who file jointly)||Above $539,900 (above $647,850 for married couples who file jointly)|
Check out this IRS resource to see how the tax rates have changed for other filing statuses not listed above.
Generally speaking, employees will be able to take larger paychecks home in 2023 due to being placed in lower brackets. However, some high-income earners won’t see much difference as they’ll pay more in social security taxes.
How You Should Prepare for this Change
Adjust your payroll systems to account for these new brackets, and encourage employees to do their due diligence to ensure that they’re not overpaying. The IRS has an online tax withholding estimator which can help with that.
Remind employees about the new tax brackets before the change goes into effect so they have ample time to plan for changes to their paychecks. Similarly, expect employees to complete and resubmit their W-4 forms, as the new thresholds will likely impact their financial situations.
3. Annual Contribution Limits for Retirement Plans Increase
The IRS has announced that it’s also going to expand the annual contribution limits for various retirement plans in 2023. An employee can defer a larger amount of their paycheck to these plans and reduce their taxable wages.
The annual limits for traditional 401K, 403B, 457, and the Thrift Savings Plan will increase from $20,500 to $22,500. Furthermore, employees aged 50 years or above will be able to make additional catch-up contributions of up to $7,500 in 2023 to these plans (up from $6,500 in 2022).
Employees enrolled in Individual Retirement Plans (IRAs) will also get a (relatively smaller) sigh of relief in 2023, as annual contribution limits are set to increase from $6,000 to $6,500. However, the catch-up limit for IRAs remains $1,000 since the IRS does not adjust it for the cost of living. Yet, employees enrolled in SIMPLE plans will now be able to make catch-up contributions of $3,500 instead of $3,000.
How Employers Should Prepare for this Change
Inform employees about the new pre-tax contribution limits to retirement plans so they can adjust their elective salary deferrals in due time. Take this step as soon as possible if your plan(s) only allow the participants to change their contributions during the open-enrollment season.
Accommodate employees who want to increase their elective deferrals to benefit from the higher contribution limit. If a third-party acts as the plan administrator, make sure that they provide your employees with all the assistance they need to adjust their contributions. Finally, ensure that your payroll system processes taxable incomes adjusted for newly elected deferrals (if applicable).
4. Annual Contribution Limits for Health Savings Account (HSA) Increase
The IRS also announced that it’s going to increase the annual contribution limits for HSAs in an effort to cancel out the effects of high inflation. According to the Revenue Procedure 2022-24, the changes to contribution limits are as follows:
- $3,850 for a person with self-only coverage (up from $3,650 in 2022)
- $7,750 for a person with family coverage (up from $7,300 in 2022)
Keep in mind that the above annual limits include contributions from both the employees and the employers. This change amounts to a near 5 to 5.5% increase in contribution limits for both coverages from 2022. For comparison, the annual contribution limits for HSAs only increased by about 1.4% between 2021 and 2022.
Employees will have the chance to contribute a slightly larger amount to their HSAs to reduce their taxable earnings. Although the difference isn’t that significant, every dollar saved counts in these harsh economic conditions.
How You Should Prepare for these Changes
Be prepared to make any changes to how much employees choose to defer to their HSAs. Tweak your payroll system to ensure the new adjustments are accounted for.
Consider contributing to your employee’s HSAs if you haven’t already. These contributions are also considered pre-taxed and can therefore help reduce the payroll tax you pay as an employer.
Overwhelmed? Download Our Payroll Tax Changes Checklist for 2023!
It’s tough keeping up with so many payroll tax changes — and it’s especially tough if you run a small HR team and do everything yourself. We’ve prepared a checklist that summarizes all the payroll tax changes for 2023 in a very concise way.
Our checklist not only goes over the main, high-level updates but also includes good-to-know actionable advice that you can start implementing right away. Download and share with your colleagues today!