December 28, 2020
Outlined below are the payroll tax rates and requirements for 2021.
The Employment Tax Rates and Wage Base effective January 1, 2021 are as follows:
Social Security – Both the employer and employee's contribution rate remain the same at 6.2%. However, the Wage Base increased to $142,800. The maximum amount of Social Security Tax for 2021 that could be withheld from your employee is $8,853.60.
Medicare Tax – The rate remains unchanged at 1.45% for both the employer and employee’s contribution and applies to all wages and compensation paid to employees.
Medicare Hospital Insurance –The rate remains unchanged at 0.9% and applies to wages and compensation paid to employees in excess of $200,000.
Federal Withholding – Refer to the tables in the Circular “E”. The Circular E is available on the Internal Revenue Service Website (www.irs.gov
Pennsylvania Withholding – The rate remains the same at 3.07%.
New Jersey Withholding – Refer to the tax tables.
Local Taxes for Pennsylvania –The PA Local Tax Enabling Act required employers with employees in PA to withhold a PA Local Earned Income Tax (if applicable) from the employee’s payroll. The rate of withholding is the greater of where the employee lives or works. Withholding rates can be found at http://munstats.pa.gov. Note: On the 2020 W-2s, Box 20, Locality Name, reflects the PSD Code of the employer.
Philadelphia has a City Wage Tax and it must be withheld if your office is located outside the city and the employee lives in the city.
Philadelphia Withholding – Philadelphia works on a fiscal year, usually changing the Wage Tax Rate on July 1 of each year. The rates are as follows:
Philadelphia Residents – 3.8712%
Philadelphia Non-Residents – 3.5019%
Pennsylvania Unemployment Tax – The Wage Base will remain $10,000 for 2021. The employee deduction for disability insurance remains at .06% with no ceiling. The 2021 employer rate will be mailed to you by December 31, 2020. The new rates are also available on the PAUC website (www.uc.pa.gov
New Jersey Unemployment Tax – Taxable Wage Base for UI and WF/SWF – employers and employees, TDI – employers is $36,200. Taxable Wage Base for TDI and FLI – employees is $138,200.
Local Services Tax for Pennsylvania – Many municipalities impose a Local Services Tax or an Occupational Privilege Tax, which can range from $10 to $52 per year. For amounts over $10, the tax is prorated over the number of pay periods in the year. Check with your local municipality for the tax or check the municipal website at http://munstats.pa.gov.
Federal Unemployment Tax – The Wage Base of $7,000 remains the same. The current tax rate is 6% on the first $7,000 of wages you pay an employee. Employers typically receive a credit of 5.4% on Form 940 reducing the FUTA rate to .6% or a maximum amount of $42 per employee per year.
IRC 401(k) Contribution and Catch-Up Contribution Limits – The deferral limits for employer-sponsored tax-deferred retirement plans for 2021 and 2020 are as follows:
- 401(k) Contribution: $19,500 for 2021 ($19,500 in 2020)
- 401(k) Catch-up Contribution: $6,500 for 2021 ($6,500 in 2020)
An employee is eligible to make “catch up” contributions if the employee is otherwise eligible to make elective deferrals under the plan and is age 50 or older on December 31. A participant who is projected to attain age 50 before the end of the calendar year is deemed to be age 50 as of January 1 of that year. This is an optional provision that first must be elected by the pension plan sponsor.
Hiring New Employees
- Verify that each new employee is legally eligible to work in the U.S.
Each new employee must complete Form W-4 and Form I-9, Employment Eligibility Verification Form. Form W-4 can be obtained on the IRS website (www.irs.gov). Form I-9 can be obtained at www.uscis.gov, go to the Forms tab, and select Form I-9.
Report all new employees to your state’s New Hire Registry within 20 days of the hiring date. The link for PA employers is http://www.panewhires.com. Multistate employers must file on-line.
Form W-2 & Form 1099 – Before the forms are finalized for the year, verify the spelling of your employee/subcontractor’s name and verify their social security or employer identification number. The Internal Revenue Service may fine $50 for every W-2 and Form 1099 with incorrect information. The due date for filing Forms W-3/W-2 and Forms 1096/1099 is February 1, 2021.
Form 1099-NEC, Non-Employee Compensation (replaces Form 1099-Miscellaneous Information Return, Box 7, Non-Employee Compensation) – The date for filing the 2020 Form 1099-NEC Information Return to the Internal Revenue Service and the Recipients is January 31, 2021.
Beginning on January 1, 2021, the standard mileage rate for the use of a vehicle is 56 cents per mile for business use, down from 57.5 cents for 2020. 16 cents per mile for medical or moving purposes for qualified active-duty members of the armed forces, down 1 cent from the 2020 rate; and, 14 cents per mile in service of charitable organizations, a rate set by statute and unchanged from 2020.
The rates apply for the use of a car, van, pickup or panel truck. Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates.
The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
If you have any questions on the above, feel free to contact me or any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ). I can also be contacted at Patti.Hills@MCC-CPAs.com and Marty McCarthy at Marty.McCarthy@MCC-CPAs.com. As always, we are happy to help.
Patricia J. Hills
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).