The Social Security and Supplemental Security Income rules and limitations are largely unchanged from 2015, yet it's still wise to review the 2016 Social Security federal limits to ensure that your business is correctly withholding and reporting as required.
Here are five items that CFOs and financial leaders should be sure to check off their list:
1) Much Unchanged
Thanks to low inflation, the basic Social Security withholding limits are unchanged from 2015. The Social Security maximum taxable earnings level is set at $118,500, with the tax rate at 6.2 percent for employees and employers. The estimated maximum employer and employee Social Security contributions stay unchanged at $7,347. The tax rate is 1.45% on all earnings. Plus, additional 0.9% can apply on earning about certain amounts.
2) Tax Brackets Up Slightly
Though inflation was low, there was still some movement, resulting in a minor change in income tax withholding brackets, as noted by the Society for Human Resource Management. For example, the 15 percent withholding rate kicks in for wages over $9,275, rather than the 2015 limit of $9,225 for taxpayers filing as individuals; the 25 percent rate kicks in for wages over $37,650, rather than the $37,450 that was in effect for 2015. For a full list of withholding brackets, you should consult the Internal Revenue Service.
Make sure that the withholding for your employees reflects these new tax brackets.
3) Special Rules for High Earners
There are special withholding rules for employees with more than $1 million in supplemental income, as outlined in IRS Publication 15 (Circular E). For example, if the total supplemental wage payments during the calendar year exceeds $1 million, the excess is subject to 39.6 percent withholding, regardless of the employee's personal allowances claimed on Form W-4.
4) Additional Taxes for Failure to Report
IRS Publication 15 also points out that organizations that fail to file the required information returns, such as 1099-MISC for miscellaneous income, W2s for wages and tax withholdings and 8027 for tip income and allocated tips, will pay higher rates for the employer portion of Social Security and Medicare taxes. The additional taxes can be quite high for organizations with large payrolls and can also hurt organizations with thin margins, so it's important that you verify all information returns are complete and on time when filed.
5) Don't Forget to Look at State Rules
As Ernst & Young points out, some states have changed their rules for supplemental income, with some of them changing rates recently. But for federal tax purposes, the optional flat tax rate of 25 percent can be used for computing withholding.
This is a good time to review your employees' withholdings to ensure that they have been revised in accordance with annual updates as well as to look for any discrepancies between your practices and the 2016 Social Security federal limits and rules outlined above. If you do find discrepancies, make corrections as soon as possible and file corrected information with regulators. You could also consider using a payroll vendor in the future so you can help ensure you remain up-to-date and compliant with regulations as they evolve.
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