February is here and it’s time for employers to catch up on payroll tax changes for the new year! The requirements and stipulations for Medicare, Social Security, unemployment insurance, and benefits such as healthcare are subject to change.
Some of these changes—not all—are a result of COVID-19. Others are normal amendments due to Cost-of-Living Adjustments (COLA), and the increase in pricing for specific benefits. Visit this blog for more on COVID-19 legislation and tax relief.
This is a good one to start with because it is easy: there will be no changes to Medicare in 2021. The tax continues to be 1.45% (for both employees and employers), and there is no limit on earnings.
There is still an additional Medicare tax on earnings over $200,000, and this rate remains 0.9%. This tax was part of the Affordable Care Act.
Social Security Tax
Now we are going to ease into some of the 2021 changes. Social Security is both the same and different as it was in 2020.
The rate continues to be 6.2% (for both employees and employers), but the limit has changed. In 2020, only the first $137,700 was subject to Social Security tax. In 2021, that amount has been increased to $142,800.
The Social Security Administration (SSA) bases those threshold amounts on the national wage index as well as cost-of-living adjustments.
Although there are no current changes in place for federal unemployment insurance (only employers pay these), that does not mean that this is something you should stop paying attention to.
Earlier in the year, when the CARES Act was passed, we saw changes in regards to extensions, and there was even an additional $600 tacked onto the unemployment benefits that employees received.
Unemployment rates are predicted to be exceptionally high in the upcoming year. With that said, there’s always the possibility of new legislation. Click here for more information about unemployment taxes.
This is the biggest change you will see. Before we go into them, you need to understand what the ACA’s affordability threshold is and what it means.
The affordability threshold is the highest percentage of household income an employee can be forced to pay for monthly premiums. This is designed so that employees aren’t forced to contribute an unreasonable amount of their earnings towards health insurance.
Every year, this has to be adjusted. Both premiums and incomes change. In 2021, the threshold will be 9.83%. In 2020, it was 9.79%, and in 2019, it was 9.86%.
Part of the reason for this change is that the cost of premiums grew faster than incomes. As an employer, you will have to determine the correct cost-sharing amount. You will also have to weigh this threshold in conjunction with the plans you are offering.
There are very real financial consequences for failing to meet the ACA’s threshold requirements. Failing to offer affordable coverage can result in a fine of $4,060.
To calculate the affordability threshold accurately, you need to have a full grasp of what your employees are earning. Without that, it will be impossible to offer insurance that meets ACA guidelines.
With PayWow, you can enter all your employees into a single directory and reference their gross and net earnings instantly. Paying your employees will likely be your largest expense. Track them efficiently and accurately with PayWow.