Now is an excellent time for both employees and employers to make sure they will reach their payroll, tax and financial objectives for calendar year 2020. The following items should be reviewed for possible action steps before your last payroll of 2020.
ON TRACK TO MEET YOUR RETIREMENT FUNDING OBJECTIVE?
An employee can contribute up to $19,500 this year from payroll as “elective deferrals” to their 401(k) and 403(b) retirement accounts. If an employee is at least age 50 by 12/31/20, an additional $6,500 can be contributed as a “catch-up” contribution. If you are participating in a SIMPLE-IRA plan through your employer, the maximum 2020 employee contribution amount is $13,500, plus $3,000 as an additional “catch-up” for those at least age 50.
Review your year-to-date payroll details to determine if you will “hit” your retirement plan targets for 2020.
HSA TARGETS ON TRACK FOR 2020?
Maximum permitted funding for 2020 to health savings accounts is $3,550 for a “self-only” HSA and $7,100 for a “family” HSA. For those employees at least age 55 this year, you can add an additional $1,000 to your maximum allowable 2020 HSA funding.
These HSA funding limits are the total combined amounts which can be contributed by an employee plus any employer matching contributions.
FLEXIBLE SPENDING ACCOUNTS (FSA’s)
Those employees who are enrolled in employer “flexible spending account” programs should review their 2020 FSA contributions (limit of $2,750 for 2020), how much they have spent, and how much remains to be spent by year-end (or a later “grace period date” early 2021 if the employer plan includes a grace period). If the employer has amended their Section 125 plan to include a “rollover provision”, an employee can carry/roll over up to $500 per year of unused FSA funds to the following year.
COLLEGE CHOICE 529 PLAN FUNDING
For employees whose employers are sponsoring Indiana College Choice 529 plan payroll deduction plans, the State of Indiana provides an Indiana resident with an income tax credit in the amount of 20% of up to $5,000 of Indiana 529 education plan funding, per household. Essentially, if a household contributes $5,000 into an Indiana 529 education plan, the State of Indiana gives you $1,000 back in the form of a tax credit on your 2020 personal tax return.
AccuPay can help an employer set-up a payroll deduction 529 plan as a no-cost employer – sponsored fringe benefit plan for employees. You can contact AccuPay or click here for program details.
ARE YOUR TAX WITHHOLDINGS ON TRACK?
All taxpayers should review their W-4 forms on file with their employer, since individual tax law has changed significantly during the past 2 years, and the IRS issued a radically different/new W-4 form for 2020, which is consistent with current federal income tax law. AccuPay has written extensively about the brand new 2020 W-4 form and practical tips on accurate completion of the new W-4 form for 2020. CAUTION—-married couples with children under the age of 17 are generally entitled to a $2,000 per child income tax credit. If you choose to reduce your federal tax withholding by your expected 2020 child tax credit, make sure you only claim this tax credit on one of your W-4 forms (married couples should not include the credit on each of their W-4 forms!!)
FAMILY MEMBERS ON THE PAYROLL
If a business owner has children or parents who provide services to their business, putting them “on the payroll” saves income taxes if the children or parents are in a lower income tax bracket than the business owner. The business should pay wages which are consistent with the value of the services, based on time spent and job complexity. For 2020, a child can earn up to $12,400 in wages without paying any Federal income tax. If the business sponsors a 401(k) or SIMPLE-IRA plan, consider paying your spouse “on the payroll” so that he/she can also participate in your business retirement plan for 2020.
REIMBURSE EMPLOYEE VEHICLE EXPENSE
The 2020 IRS permitted business mileage rate is 57.5 cents per mile.
“S” CORPORATION PAYROLL MEDICAL PREMIUMS
Based on IRS announcements and positions they have taken within the last few years, it is essential that “S” corporation owner – employees have their medical insurance premiums either paid directly by the “S” corporation or personal health insurance premiums reimbursed by the “S” corporation. Health insurance premiums paid personally by the “S” corporation owner-employee and not reimbursed will not be eligible for the “self-employed health insurance deduction”.
Make sure all employed owners of a “S” corporation have been reimbursed for their premiums by 12/31/20 (if not directly paid by the “S” corporation).
“S” CORPORATION OWNER WAGES
“S” corporations which are profitable are required to pay “reasonable compensation” to their owner-employees. If you own a profitable “S” corporation and have taken little or no wages to date in 2020 consult with your tax advisor as to “catching up” your compensation to a “reasonable level” before the end of 2020.
IN CONCLUSION
Call one of AccuPay’s “CPP/CPA advisor service teams” at 317-885-7600 to discuss any questions or comments you have about payroll tax planning adjustments needed before year-end 2020.
See how increasing your contributions to a 401(k) can affect your paycheck and your retirement savings with our 401k calculator.