Dec 21 Payroll Tax Rate Updates for 2021
In order to calculate payroll taxes accurately and effectively for your company and employees next year, it is important to understand the new and existing compliance requirements in effect for 2021. Below is an overview of the tax rates, taxable wage bases, and other updates that will affect your payroll processes when January 1 arrives.
Federal Insurance Contributions Act (FICA)
The wage base will increase from $137,700 to $142,800. Under current law, the tax rate will remain the same at the rate of 6.2% to be paid by both the employer and the employee. The maximum tax will increase from $8,537.40 to $8,853.60.
There is no wage base for Medicare. The tax rate is 1.45% to be withheld from the employee and 1.45% to be paid by the employer.
Additional Medicare Tax
An additional Medicare tax is payable over various threshold amounts depending on the filing status reported on the taxpayer’s personal income tax return. This is a withholding tax withheld from the employee only and carries no tax requirement for the employer. For payroll tax purposes, the only relevant item is wages including taxable benefits paid.
This additional Medicare tax should be deducted from the employee, at the rate of 0.9%, for all wages (and taxable benefits) paid in excess of $200,000.
Federal Unemployment Tax
The current gross FUTA tax rate is 6.0% of taxable wages, to be paid by the employer only. However, an allowed credit effectively reduces the tax rate to a net of 0.6% for wages paid up to the wage limit of $7,000 (for the majority of states). The credit and reduced rate are available by filing the Form 940 for 2020.
In New Jersey, New York, and Connecticut, where no credit reductions exist, the effective FUTA tax rate is 0.6% for 2020. For more information on state-specific credit reductions, refer to the Schedule A of Form 940 although no states are subject to credit reduction for the 2020 filing.
NJ Unemployment and Disability
For 2021, the employer base for unemployment and disability increases from $35,300 to $36,200. The employer rate for these taxes is determined by the State and sent in a notice in July. The unemployment base for the employee will increase from $35,300 to $36,200 while the rate will remain the same at .425%. The maximum tax will increase from $150.03 to $153.85.
The base for the disability for the employee will increase from $134,900 to $138,200 and the tax rate will increase from .26% to .47%. This will result in the maximum tax increasing from $350.74 to $649.54.
NJ Family Leave Insurance
The wage base and rate will both increase in 2021. The wage base for the employee will increase from $134,900 to $138,200 and the tax rate will increase from .16% to .28%. This will result in the maximum tax increasing from $215.84 to $386.96.
NJ Payroll Tax Payments
As a reminder, payroll tax payments will only be accepted by New Jersey using an online payment method. There will no longer be an option to call in the tax payments.
NY Unemployment Compensation
The maximum wages subject to New York unemployment tax will increase from $11,600 to $11,800 in 2021.
There will be changes to the minimum wage in many states in 2021. Locally, the New Jersey minimum wage will increase from $10.30 to $11.10 for under five employees and for six or more employees it will increase to $12.00.
New York will continue to mandate different minimum wages depending on the location and type of work.
The Connecticut minimum wage increased to $12.00 on September 1, 2020 and will change to $13.00 on August 1, 2021. Please review your specific state’s requirements to determine your minimum wage responsibilities.
NJ Paid Sick Leave
New Jersey requires businesses to provide paid sick time to employees. Make sure to follow up on the specific requirements. For more information, please reference Sax’s alert on this topic: “New Jersey Paid Sick Leave Update”.
PEO (Professional Employer Organization)
As a reminder, if your company uses a PEO, make sure that the organization has received the IRS PEO Certification. This will relieve your company of withholding tax responsibility.
NJ Sales Tax
The NJ Sales Tax rate remains at 6.625% in 2021. Be sure to review your records and any computer programs that use this information.
Newark Payroll Tax
The Newark payroll tax rate is 1% of wages for services performed within Newark, for services supervised from Newark, and for wages of employees who principally report to a location in Newark. If the total wages are less than $2,500 per quarter, no tax is due. The Newark payroll tax return is due quarterly with the appropriate payment.
Jersey City Payroll Tax
The Jersey City payroll tax rate is 1% of wages for services performed within Jersey City and for services performed outside Jersey City but supervised within Jersey City. Employees living within Jersey City are excluded. If the total wages are less than $2,500 per quarter, no tax is due. The Jersey City payroll tax return is due quarterly with the appropriated payment.
NY MTA Payroll Tax
There is a tax on wages for employees who work within the MTA district in NY. This tax is on a graduated rate from .11% to .34%. If the total wages for the quarter do not exceed $312,500, there is no tax liability.
Form I-9 (Employment Eligibility Verification – Department of Homeland Security – US Citizenship and Immigration Service)
A new version of this form was issued on October 21, 2019. The changes are designed to simplify the process of completing the form and to streamline the certification process.
A new W-4, Employee’s Withholding Allowance Certificate, was released by the IRS for 2020. New employees are required to complete the new W-4 while existing employees have the option to continue to have the W-4 on file with the employer used or completing a new form.
If a supplemental wage payment is made separately from base wages, different methods need to be used to determine withholding taxes. If the supplemental wage payment is under $1 million, for withholding taxes:
- It can be combined with base wages and the appropriate withholding should be taken. Alternatively, withholding can be taken at 22% (no other percentage can be used).
- If supplemental wage payments made during the year exceed $1 million, the withholding rate is 37% (or the highest rate of income tax for the year) on the portion in excess of $1 million.
Backup Withholding Rate
For any payments subject to backup withholding, the rate is 24%
As we continue into the new year, Sax will keep you informed of any additional changes made to the above outline of payroll tax rates and wage bases. For further information, please contact Sax advisor Alan S. Isaacs, CPA, MBA at [email protected].