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Payroll Taxes in 2020: The Dos and Don'ts

Posted December 17, 2019 by Justworks in Keeping Compliant
Filing payroll taxes accurately takes work, especially when keeping track of changing tax regulations. Follow these 2020 payroll tax tips to help you stay compliant.

The subject of payroll taxes can a prickly one for HR professionals and business owners. There’s a lot involved in staying compliant with payroll tax regulations, but few of us have the time to manage it.

Each new calendar year brings potential changes to a system that’s already difficult to figure out. To make matters worse, the penalties and fees for misfiling or inaccurate payroll tax deposits can be steep, especially for small businesses. So to get you ready to tackle payroll taxes in the new year, here are the dos and don’ts you should keep in mind.

Understand Changes to Employer Taxes in 2020

Understanding upcoming changes to employer taxes can help you avoid misfiling them in 2020. But to start, you need to know where your payroll taxes are actually going in the first place. If you’ve been running payroll for a while, you’re probably familiar with FICA taxes, the payroll taxes that fund Social Security and Medicare programs.

While FICA may look like a single line item on your paycheck, it’s in fact split into two calculations that determine the final amount of tax withheld: a Social Security tax rate and a Medicare tax rate.

The payroll tax rate that goes toward Social Security is currently set at 6.2%, and will stay the same in 2020. In 2020, employees’ wages only up to $137,700 are subject to Social Security. They will not have to remit to the Social Security side of FICA in excess of $8,527.40 or 6.2% of $137,000. The tax rate for Medicare is significantly lower, at 1.45%, but — all covered wages are subject to this tax.

Related Article: What Payroll Taxes Are Actually Used For

Know When Your Payroll Taxes Are Due

In 2018, the IRS assessed more than $13.0 billion in additional taxes for returns not filed timely and collected more than $1.4 billion with delinquent returns. That’s not exactly chump change for a small business. If these mistakes are seemingly so common, how do you avoid them? When exactly do you need to deposit your payroll taxes? It all depends on what’s referred to as your “lookback period.”

Your lookback period is how the IRS determines your payroll tax deposit schedule. It’s based on your total gross payroll tax liability for the 12-month period that ended on the June 30 of the previous year. Essentially, the amount of taxes reported during this time will determine your payroll deposit schedule — either on a monthly or semi-weekly schedule — based on how much payroll taxes you owed in the past.

To find your total payroll tax liability, look at your 941 Forms for each quarter within your lookback period. (If you’re new to this or have other questions, check out our Know the Basics guide for Form 941.)

You’ll see the amount paid that quarter under Line 12: Total Taxes After Adjustments and Credits. The sum of these four quarterly 941 Forms from the lookback period will tell you when you’ll need to deposit payroll taxes.

If the total taxes on Form 941, Line 12: Total Taxes After Adjustments and Credits, for all four quarters of your lookback period were $50,000 or less, then you are a monthly schedule depositor for the year. You’ll deposit employment taxes on payments made during a month by the 15th day of the following month. If you’re a new employer, you will be a monthly depositor because your tax liability for the lookback period would have been zero.

If your total taxes on Form 941, Line 12, during the lookback period were more than $50,000, then you’re a semi-weekly schedule depositor. Any payments made on Wednesday, Thursday, and/or Friday require you deposit the employment taxes by the following Wednesday. And any payments made on Saturday, Sunday, Monday, and/or Tuesday require you deposit employment taxes by the following Friday.

If you want to help your employees get a better picture of their tax withholdings, check out this calculator from the IRS which helps determine the right amount they should withhold from their paychecks: https://www.irs.gov/individuals/tax-withholding-estimator

Related Article: 6 Small Business Tax Deductions to Remember

Check If the Benefits You Offer Are Taxable

If you’re thinking of offering new benefits to your employees in 2020, you should understand what benefits are taxable or non-taxable, and what the limits are for the benefits you must pay tax on.

Generally, most fringe benefits are taxable by the IRS, although there are several non-taxable fringe benefits.

A cafeteria plan is a written arrangement which allows employees to pay for certain qualified benefits with pre-tax dollars.

In the most recent draft of the IRS Publication 15-B for 2020, the IRS names some of these qualified benefits, including:

  • Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance)
  • Adoption assistance
  • Dependent care assistance
  • Group-term life insurance coverage (including costs that can't be excluded from wages
  • Health savings accounts (HSAs) (distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services

In Revenue Procedure 2019-44 the IRS announced inflation adjustments for several taxable fringe benefits in 2020:

  • Adoption assistance limit is $14,300, up from $14,080 in 2019
  • Health flexible spending account (FSA) limit on pre-tax contributions employees can make, through a cafeteria plan, is $2,750, up from $2,700 in 2019
  • Transportation fringe benefit limit is $270, up from $265 in 2019

Don’t Forget to Adhere to Payroll Tax Laws

If you’re thinking of offering new benefits to your employees in 2020, you should understand what benefits are taxable or non-taxable, and what the limits are for the benefits you must pay tax on.

Generally, most fringe benefits are taxable by the IRS, although there are several non-taxable fringe benefits.

A cafeteria plan is a written arrangement which allows employees to pay for certain qualified benefits with pre-tax dollars.

In the most recent draft of the IRS Publication 15-B for 2020, the IRS names some of these qualified benefits, including:

Don’t Forget to Adhere to Other State and Federal Payroll Tax Regulations In addition to FICA taxes, you also need to ensure you’re complying with other state and federal payroll tax regulations.

Federal Unemployment Taxes

Also known as FUTA, the Federal Unemployment Tax Act was created to provide funds to those who have lost their jobs. FUTA is paid by the employer — not the employee — at a tax rate of 6.0% on the first $7,000 of earned income in a given work year. Once the limit is hit, the employer is no longer taxed on that given individual.

State Unemployment Taxes

Most states have their own unemployment tax under the (you guessed it) SUTA, or State Unemployment Tax Act. The tax rates vary by state. States typically reassign their tax rates for state unemployment taxes that are effective January 1.

State and Local Income Taxes

Employers are also responsible for withholding state and local income taxes from employees’ wages. These vary state to state. The only states without an income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Related Article: Tax Tips Every Business Owner Needs to Know

Team Up with a Payroll Tax Solution

Managing payroll while keeping compliant with state and federal tax regulations is the ultimate juggling act. But you don’t have to go it alone. Solutions like Justworks provide tools and support to easily run payroll while helping you file your payroll taxes and stay on top of employment-related tax compliance.

Learn more about our payroll and compliance tools and get the support you need to run your business with confidence.

Know your tax forms. Because the sheer number of tax forms for small businesses can feel endless.

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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.