Posted by Unifirst Financials & Tax Advisors

Important 2020 Tax Numbers for Employees

Important 2020 Tax Numbers for Employees

You have to remember the basic tax planning for 2020 even if we are all super busy in January. Key numbers in many tax-law provisions are adjusted for inflation at the start of each year. January is when you need to pay attention to these figures even if the IRS and Social Security Administration announce these figures during the fall. For employees, these adjustments are very important to them, their paychecks and also their basic tax planning for 2020. 

It will be so hard to spot right away the things that matter to you since many tax-code sections are adjusted. Some are, for example, the best fit for executives that are super-wealthy and other individuals (in 2020, $23.16 million for married joint filers and $11.58 million for single taxpayers). Others also matter only to corporate benefit-plan administrators. For example, in 2020 there will be a $130,000 rise to the income definition of “highly compensated employee” stock purchase plans (ESPPs) and 401(k) plan nondiscrimination testing. 

All employees should know the top three sets of tax figures that are stated below. Compensation from work is what it relates to are the potential need for estimated tax, paycheck withholding, and your retirement savings. 

1. Social Security Wage Base

Set annually by the Social Security Administration, Social Security tax (6.2%) applies to wages up to a maximum amount per year. Depending on your income level Medicare will be uncapped with a rate of either 1.45% or 2.35%, and income above the threshold mentioned will not be subject to Social Security tax. In 2019 the Social Security wage cap was $132,900 and it increased to $137,700 in 2020. This means that in 2020 the maximum possible Social Security withholding is $8,537. You will see 6.2% more in your paycheck once your income is over that amount.

2. Income-Tax Brackets and Withholding

How an additional amount of compensation would be taxed at your marginal tax rate (i.e., for an additional dollar of income in your current tax bracket, the percentage of tax you pay) will be explained in the table below. The number will tell you whether the total tax that you will owe for 2020 covers the taxes withheld according to your information on the newly revised Form W-4. Be sure to know and understand your average or effective tax rate to avoid “penalizing” additional income in your mind. 

Do you need to pay estimated taxes?

Supplemental wage income is income from a non-qualified stock option exercise, cash bonus, or vesting of restricted stock units are additional compensation received. Your W-4 rate will not be used by most companies for federal income tax withholding. Instead, the 22% IRS flat rate is what they will apply for supplemental income (in excess of $1 million, the yearly supplemental rate is 37%).

3. Qualified Retirement Plans

From your pay checks, you can elect to defer up to $19,500 into a qualified retirement plan in 2020 such as 401(k). Compare to the 2019 limit, this is a $500 increase. 

In 2020, there will be $57,000 as the total ceiling for deferrals to defined contribution retirement plans, this is a $1,000 increase from 2019. If you are 50 or older, both these limits are $6,500 higher. In 2020 in the calculation for qualified deferrals, the amount of compensation income that can be considered is $285, 000. To make the process of making changes in your compensation deferral election, check with your company’s 401(k) plan administrator.

Do you want to defer more income?

You should check whether your company has an excess 401(k) plan or other name or better considered as a non-qualified deferred compensation plan. You can check online if you want to know more about these plans. 

There are a lot of detailed instructions showed on the IRS website regarding the inflation adjustments and provisions related to various income tax. 

There is also a part of the IRS website that has a title the About Form W-4, this is where you can get additional information about the revision. 

If you are unsure about what is the best course of action to do, better consult a financial advisor so that you can find the best way for you. 

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