2014 Payroll Related Tax Updates

With 2013 coming to a close, the Internal Revenue Service has released its series of tax updates for 2014.

The following topics are discussed in this article:

  • Social Security (OASDI)
  • Medicare
  • 2013 FUTA Credit Reduction
  • Minimum Wage Changes
  • Section 132 Mass Transit & Parking
  • Pension Plan Limitations
  • Health FSA’s

These updates have been compiled and are accurate as of December 9th, 2013 and may still change before (or after) the new year.

Social Security (OASDI)

On October 30, 2013, the Social Security Administration announced for calendar year 2014, the amount of earnings taxable for Social Security (Old Age Survivors and Disability Insurance, or “OASDI”) will increase from $113,700 to $117,000. The employee and employer tax rate will remain unchanged at 6.2%. With this increase in taxable wages, the maximum Social Security tax payable by an employee will be $7254.

Medicare

In 1993, the Omnibus Budget Reconciliation Act removed the taxable wage limit for the Medicare tax beginning in 1994 and years thereafter. Therefore, there is no maximum employee or employer contribution amount for Medicare tax for 2014.  All covered wages will be subject to Medicare tax at a rate of 1.45%. Employers will match the employee’s tax.

As of January 2013, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly, $125,000 for married couples filing separately, and $200,000 for filing single) pay an additional 0.9% in Medicare taxes.  The Additional Medicare Tax is not matched by employers.

2013 FUTA Credit Reduction

Under the provisions of the Federal Unemployment Tax Act (FUTA), employers pay Federal Unemployment Insurance (FUI) on the first $7,000 of wages paid for each employee. The current FUTA tax rate is 6%. Generally, employers may receive a FUTA Tax Credit of 5.4%, resulting in a net FUTA tax rate of 0.6% (6.0%-5.4%=0.6%).

When a state lacks the funds to pay state unemployment insurance benefits, the state may borrow money from the federal government. When these loans remain unpaid for over two years, Title XII of the Social Security Act allows the federal government to recover funds by reducing the FUTA tax credit. This results in an increase in FUTA taxes for employers. The credit reduction is 0.3% for the first year and increases 0.3% each year the state has not repaid the federal loans.

The following states will have a credit reduction for 2013:

State Credit Reduction
Arkansas 0.9%
California 0.9%
Connecticut 0.9%
Delaware 0.6%
Georgia 0.9%
Indiana 1.2%
Kentucky 0.9%
Missouri 0.9%
New York 0.9%
North Carolina 0.9%
Ohio 0.9%
Rhode Island 0.9%
Virgin Islands 1.2%
Wisconsin 0.9%

Minimum Wage Changes

Currently the Federal Minimum Wage for covered employees is set at $7.25 per hour. In cases where an employee is subject to both the state and federal minimum wage laws, the employee is entitled to the higher of the two minimum wages.

Click here to go to the Department of Labor’s Minimum Wage Listing By State.

Upcoming Minimum Wage Changes:

Arizona $7.90
California $8.00 Increase to $9.00 on July 1, 2014 and $10.00 on January 1, 2016. (San Francisco $10.74, San Jose $10.15)
Colorado Increase to be announced January 1, 2014.
Connecticut $8.70 $9.00 effective January 1, 2015.
Florida $7.93
Missouri $7.50
Montana $7.90
New Jersey $8.25
New York $8.00 Effective December 31, 2013. ($8.75 on December 31, 2014 and $9.00 on December 31, 2015).
Nevada $7.25 $7.25 for employees receiving qualifying health benefits, $8.25 for employees who do not receive qualifying health benefits.
Ohio $7.95
Oregon $9.10
Rhode Island $8.00
Vermont $8.73
Washington $9.32

Section 132 Mass Transit & Parking

Effective January 1, 2014 the monthly limit for Mass Transit and parking Reimbursement have changed.

This represents a significant decrease in monthly contributions. We anticipate that rates may change prior to year-end but have no additional guidance at this time.

Mass Transit     $ 130 per month

Parking             $ 250 per month

2014 Pension Plan Limitations

“Some pension plan limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.”

Highlights are listed below. For the full IRS article please click here.

Benefit Plan Limits 2013 2014
§ 401(k),§ 403(b) and § 457 Elective Deferral Limit: $ 17,500 $ 17,500
§ 414(v) Catch-Up Contribution Limit: $ 5,500 $ 5,500
§ 415 Defined Benefit Plan Limit: $ 205,000 $ 210,000
§ 415 Defined Contribution Annual Limit: $ 51,000 $ 52,000
§ 401(a)(17) Annual Compensation Limit: $ 255,000 $ 260,000
§ 414(q) Highly Compensated Employee: $ 115,000 $ 115,000
IRAs for Individuals 49 and below: $ 5,500 $ 5,500
IRAs for Individuals 50 and above: $ 6,500 $ 6,500
Simple Elective Deferral: $ 12,000 $ 12,000

Health FSA’s

In Notice 2013-71, the IRS announced that Health FSAs can have up to a $500 carryover of unused amounts to the next plan year. This creates an exception to the long-established Use It-or-Lose  It Rule.

The Health FSA salary reduction contribution limit under code §125(i) remains at $2,500.

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