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Important 2020 Tax Numbers that Employees Should Know

Important 2020 Tax Numbers that Employees Should Know

January is usually packed with many activities. And, yes, we understand that tax is a sore subject for many people, planning for tax in the year is inevitable. Ideally, it is the beginning of the year that essential numbers in the tax laws get adjusted for inflation. Although these numbers are usually announced in the Fall, paying attention to these numbers at the beginning of the year can save you a lot. These adjustments are vital as they affect not only you as an employee but your paycheck and, above all, your basic tax for the year.

Year in, year out, the IRS adjusts many tax codes. You might not know the one that concerns you. There are some that concerns only extremely wealthy executives and other individuals. A good example is a federal exemption for state tax ($11.58 Million for single taxpayers in 2020 and married filers had $23.16). Other taxes, as well concerns only corporate benefit plans. For instance, when you define "highly compensated employee," based on income, it affects the eligibility of employee stock purchase plans (ESPPs).

We will be exploring the three main tax numbers that all employees should know. These numbers have to do with the potential need for estimated taxes, retirement savings, and payment withholding.

Social Security Wage Base

Social security tax, which amounts to 6.2%, applies to the maximum amount each year that the Social Security Administration sets. Social security tax does not apply to any income above this threshold. In contrast, Medicare tax is uncapped and has a rate of 2.35% or1.45%, which is a factor of your income.

In the previous year 2019, the social security wage was $132,900 and rose to $132,700 in the present year. As a result, the maximum social security withholding for the year 2020 is $8,537.40. Any income over this will enjoy an extra 6.2% in the paycheck.

Income-Tax Brackets and Withholding

Income brackets and rates in 2020 

Rate

Taxable Income (Single)

Taxable Income (Joint)

10%

0 to 9,075

0 to 19750

12%

9,076 to 40,125

19,751 to 80,250

22%

40,126 to 85,525

80,251 to 171,050

24%

85,526 to 163,300

171,051 to 326,600

32%

163,301 to 207,350

326.601 to 414,700

35%

207,351 to 518,400

414,701 to 622,050

37%

518,401 and above

622,051 and above

Curled from www.forbes.com

The table above sheds light on how the marginal tax rate will affect an extra compensation amount. In other words, it helps you understand how much tax you will have to pay for every extra income in your present tax bracket. 

This number can help you understand if the tax withheld based on your information on the newly revised form W-4 will serve the entire tax you owe in 2020.

Should You Pay Estimated Tax?

When you receive extra compensation like cash bonus or income from a non-qualified stock option, it is considered as supplemental wage income. Many companies, however, do not use the W-4 rate for federal tax withholding. Instead, the IRS flat rate of 22% is usually applied for supplemental income.

Qualified Retirement Plans 

In the New Year 2020, you might choose to defer as much as $19,500 from your paycheck. This money can be transferred to qualified retirement plans. An example is your 401(K) – a $500 increase over last year's limit.

In addition, the limit for people deferring to define their contribution retirement plan also had a thousand dollar increase – rising to $57,000. This value included any extra part you contributed to your employer. If you are 50 years or above, these two limits is $6,500 higher. For qualified deferrals, the amount of compensation income that applies in the calculation is $285,000.

You can get more details on how to make changes in your compensation deferral election in your company’s 401(K) plan administrator. 

If you also want to defer more, you can look for an excess 401(K) plan in your company. This is a non-qualified deferred compensation plan that some companies have, and luckily your company might have as well. 

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