What Employers Should Know About Payroll Changes for 2018

FICA Tax Rate Increase

The maximum amount of earnings subject to the Social Security payroll tax in 2018 will be increasing $1,500 from the current $127,200 to $128,400. The 7.65 percent employee tax rate remains unchanged and is the combined rate for Social Security (6.2 percent) and Medicare (1.45 percent). These rates do not include the additional .09 percent for individuals with earned income of $200,000 and more ($250,000 and more for married couples filing jointly).

Social Security is financed by a 12.4 percent tax on wages up to the taxable earnings cap, with half (6.2 percent) paid by workers and the other half paid by employers. As a result, employers also will pay more in 2018, as their 6.2 percent share is applied to additional earnings.

Social Security Benefits Increase

Monthly Social Security and Supplemental Security Income benefits for more than 61 million Americans will increase by 2 percent in 2018. According to a new SSA fact sheet, the maximum Social Security benefit for workers retiring at full retirement age in 2018 will be $2,778 per month, up from $2,687 per month in 2017.

401(k) Limit Increase

The contribution limit for employees who participate in 401(k) and 403(b) plans will increase from $18,000 to $18,500 in 2018. The overall amount they can defer, including pretax, after-tax, and employer contributions, is the lesser of 100% of their compensation or $55,000. Employees age 50 and over have the same ‘catch-up’ contribution limit of $6,000.

Income Tax Bracket Changes

As of press time, Congress has reached a tentative agreement on tax reform legislation. If it’s finalized, any adopted changes could alter the income tax brackets for 2018. Income that is subject to a higher tax bracket could for example influence an employee’s decision on how much to defer to a 401(k) or the amount of allowances they wish to claim on their W-4.

Reference: Celeste Gibson, FPC