At the start of each year, key numbers in many tax-law provisions are adjusted for inflation. The IRS and Social Security Administration typically issue these figures in October. At that time, however, employees and their financial advisors are more focused on year-end financial planning and 4th-quarter estimated taxes.
Now, at the start of the year, is when you need to pay attention to the new numbers. Many of the adjustments are important for employees, their paychecks, and their basic tax planning for 2019.
Numerous tax-code sections have been adjusted. Some are of interest only to super-wealthy executives and other individuals, such as the federal exemption for estate tax ($11.4 million per individual, $22.8 million per married couple in 2019). Others are chiefly matters for corporate benefit-plan administrators. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans (ESPPs) and 401(k) plan non-discrimination testing, rose to $125,000 in 2019.
Below are the top three sets of tax figures that employees should know. They relate to compensation from work involving paycheck withholding, the potential need for estimated taxes, and your retirement savings.
1. Social Security Wage Base
Social Security tax (6.2%) applies to wages up to a maximum amount per year set annually by the Social Security Administration. Income above that threshold is not subject to Social Security tax (by contrast, Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level). In 2019, the Social Security wage cap is $132,900, up slightly from $128,400 in 2018. This means the maximum possible Social Security withholding in 2019 is $8,239.80. Once your income is over that amount, you’ll see 6.2% more in your paycheck!
2. Income-Tax Brackets
The table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate (i.e. the next highest rate from your standard tax bracket). This tells you whether the taxes withheld according to your preference on Form W-4 will cover the total tax you will owe for 2019. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.
Income Tax Brackets And Rates In 2019
|RATE||TAXABLE INCOME (SINGLE)||TAXABLE INCOME (JOINT)|
|10%||$0 to $9,700||$0 to $19,400|
|12%||$9,701 to $39,475||$19,401 to $78,950|
|22%||$39,476 to $84,200||$78,951 to $168,400|
|24%||$84,201 to $160,725||$168,401 to $321,450|
|32%||$160,726 to $204,100||$321,451 to $408,200|
|35%||$204,101 to $510,300||$408,201 to $612,350|
|37%||$510,301 or more||$612,351 or more|
Need To Pay Estimated Taxes?
Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies use not your W-4 rate but the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly income amounts in excess of $1 million).
As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% may not cover all of the taxes you will owe that on supplemental wage income. In that case, you must either put extra money aside for your 2020 tax return, pay estimated taxes, or adjust your W-4 for your salary withholding to cover the shortfall.
3. Qualified Retirement Plans
In 2019, you can elect to defer up to $19,000 from your paychecks into qualified retirement plans, such as your 401(k). This is a $500 increase over the 2018 limit. The total ceiling for deferrals to defined contribution retirement plans (including any additional part contributed from your employer) rose to $56,000 in 2019, a $1,000 increase. Both of these limits are $6,000 higher if you are 50 or older. The amount of compensation income that can be considered in the calculation for qualified deferrals is $280,000 in 2019.
Want To Defer More Income?
Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan or other name. For more on these plans, see the website myNQDC.com.
Here are resources with more details on the many adjusted 2019 tax numbers: