Announced: Wage Cap Increase for 2021 Social Security Payroll Taxes
The Social Security Administration (SSA) announced on Oct. 13, 2020, that the wage cap for Social Security payroll taxes will increase in 2021. What do employers need to know about this update?
What’s the Story?
Beginning Jan. 1, 2021, the cap on maximum earnings subject to the Social Security payroll tax will increase from $137,700 to $142,800, a jump of $5,100. According to the SSA, this change is based on the increase in average American wages. The tax rate for employees/employers and self-employed individuals will remain the same, at 7.65% and 15.30% respectively.
The same news release detailed that Social Security and Supplemental Security Income (SSI) benefits will increase 1.3%—a change that will impact approximately 70 million Americans. The update accounts for a relatively low cost-of-living adjustment (COLA), which should increase benefit checks by about $240 on average, according to Fox Business.
Alongside the announcement, the SSA released a fact sheet that covers all changes in full detail. It can be found here.
What Should Employers Do About the Change?
Ultimately, HR needs to develop a clear communication plan for affected employees. It’s possible that for many small businesses, the new wage cap will impact only a few employees. Regardless, these workers need to understand the changes to their paychecks in the coming year.
In a recent article, SHRM backed up this advice. The author said that American employers should update their payroll systems to account for the new taxable wage base, which will soon be capped at $142,800. Likewise, the article points out that employers should notify affected employees of the update, and that their take-home pay may be slightly decreased beginning in January.
HR should also keep in mind that in August 2020, President Trump signed an executive order that in effect implemented a payroll tax “holiday” for employer deferments. The IRS issued guidance later that month, indicating that employers could choose to refrain from withholding the employee portion of their payroll taxes.
Planning Ahead for 2021
The Social Security payroll tax adjustment is just one of many compliance changes to come before the year ends. Typically, updates are made to Form 1095-C for ACA reporting and tax-advantaged savings account limits increase from year to year.
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