How will payroll taxes be different in 2023?

Payroll taxes are the primary source of revenue for social insurance programs, including Social Security and Medicare. After income taxes, payroll taxes are the second-largest source of federal revenue. Social Security payroll taxes are levied equally on workers and employers on all wages up to a certain level.

The current rate for social security is a combined 12.4% of earnings (6.2% for the employee and 6.2% for the employer). Self-employed individuals are liable for the full 12.4%. Medicare is withheld from earnings at a rate of 2.9% (1.45% for the employee and 1.45% for the employer).

Taxes withheld for Medicare and Social Security are referred to as the Federal Insurance Contributions Act (FICA). On the payroll, Medicare taxes are referred to as Fed Med/EE, and Social Security is shown as OASDI (Old-Age and Survivors and Disability Insurance).

Understanding payroll tax rates, payment deadlines, and expected changes can help you avoid costly mistakes and maintain effective payroll tax compliance. A Professional Employer Organization (PEO) can assist your business with payroll tax management.

Increased Social Security Wage Base in 2022

Each year, the government sets a limit on the amount of payroll earnings subject to Social Security taxes. In 2022, the wage base for computing Social Security tax increased from $147,000, an increase of $4,200 from the 2021 level. Earnings and self-employment income above this threshold aren’t subject to payroll taxes.

The maximum amount of Social Security tax a worker or employer will have withheld is $9,114 (0.062 x 147,000). Cost of living adjustments (COLA) increased by 5.9% for 2022, compared with a 1.3% increase for 2021.

Provisions Affecting Payroll Taxes in 2023

Early signs point to an even higher payroll tax rate and Social Security COLA for 2023 than for 2022. New provisions by the Social Security Administration provide long-range estimates of changes that could affect the current-law. This includes OASDI payroll tax rate as well as the contribution and benefits base. This puts a cap on the amount of wages subject to payroll tax and credited for benefit computation.

Here are the provisions set to affect payroll taxes in 2023:

  • Increase the payroll tax rate to 16.1%, up from the current 12.4%, with no changes in the taxable income.
  • Eliminate the taxable maximum and apply the full 12.4% payroll tax rate to all wages. Benefit credit will be provided for earnings above the taxable maximum.
  • From 2023, apply 12.4% payroll tax rates on earnings above $400,000. All earnings exceeding the current-law taxable maximum of $400,000 will be subject to payroll taxes.
  • Increase the taxable maximum to ensure that 90% of all earnings are taxable.
  • Beginning in 2023, the taxable maximum will be increased by an additional 2% per year until 90% of taxable earnings are covered.
  • Beginning in 2023, a 4% payroll tax rate on earnings above $526,000 will apply.

PEO Payroll and Payroll Tax Management

Payroll tax requirements are complex and ever-changing. If mistakes are made when calculating or filing payroll taxes, they could result in costly penalties. As a small or medium-sized business owner, it can be challenging to file taxes correctly and meet payroll tax deadlines.

With all the numbers to juggle, keeping up with regulations, filling out forms, and staying on top of tax deadlines can eat up valuable time. Outsourcing payroll tax management to a PEO is one of the most secure and effective ways to stay ahead of payroll tax obligations. PEOs are experts in employment-related business functions and payroll taxes.

When you partner with a PEO, you enter into a co-employment agreement. This allows the PEO to assume certain responsibilities based on your business’ needs.

A PEO will become the “employer of record” or “administrative employer,” so it has the authority to withhold, pay, report, and file payroll taxes. The PEO will report and pay taxes under their own federal employer identification number (EIN). The right PEO will make sure that your business submits the right amount of payroll taxes based on the number of employees you have, your employee’s wages, and regulatory requirements.

Outsource Your Payroll and Payroll Tax Management to Vested HR

Vested HR handles the complexities that come with payroll tax management. We have the right tax processing expertise necessary for accurate, timely, and reliable payroll tax filing.

Our team keeps up with changing federal, state, and local compliance mandates to ensure compliance. With our PEO payroll tax management services, you and your team can focus on your company’s strategic objectives and goals.

Contact us today to schedule a consultation to learn more about our PEO services.