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 2021. The following items should be reviewed for possible action steps before your last payroll of 2021.
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 12/31/21, 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 2021 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 2021.
HSA TARGETS ON TRACK FOR 2021?
Maximum permitted funding for 2021 to health savings accounts is $3,600 for a “self-only” HSA and $7,200 for a “family” HSA. For those employees at least age 55 this year, you can add an additional $1,000 to your maximum allowable 2021 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 2021 FSA contributions (limit of $2,750 for 2021), how much they have spent, and how much remains to be spent by year-end (or a later “grace period date” early 2022 if the employer plan includes a grace period). If the employer’s Section 125 plan includes a “rollover provision,” an employee can carry/roll over up to $550 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 2021 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?
Since the IRS totally revised the employee W-4 tax withholding form in 2019, it is more important than ever that individuals review their 2021 income tax withholdings to ensure they are sufficient to avoid large balances of tax due on their 2021 Form 1040. Here is a link to our previous PayDay, “Mid-Year Paycheck Review – Important,” which includes details about the IRS online calculator you can use to review your 2021 tax witholdings. If you wish to change your withholdings for the balance of 2021, provide your employer with a new 2021 W-4 form.
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 2021, a child can earn up to $12,550 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 2021.
REIMBURSE EMPLOYEE VEHICLE EXPENSE
The 2021 IRS permitted business mileage rate is 56 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 12/31/21 (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 2021 consult with your tax advisor as to “catching up” your compensation to a “reasonable level” before the end of 2021.
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 2021.
See how increasing your contributions to a 401(k) can affect your paycheck and your retirement savings with our 401k calculator.