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Workforce Management

The Top 2021 Payroll Questions Answered For Employers

One Minute Takeaway

  • We answer key questions on payroll compliance for 2021.
  • It’s essential to take into account the latest IRS rulings.
  • HR teams also can’t afford to ignore state-level legislation.

Each year, HR pros are on the lookout for changes to payroll compliance: updated IRS policies, state laws and, this time round, potential changes brought by the new administration. As part of Paycor’s Look Forward webinar series, Paycor Compliance Analysts James Schwantes and Arlene Baker shared their experience and expertise answering customer questions on what payroll managers need to know. Below, you can find a lightly-edited selection of their answers. Remember, you can track our upcoming webinars on Paycor’s webinar hub.

Q: How do I collect the Employee Social Security taxes that were deferred in 2020?

A: Employers were required to withhold the total taxes deferred for an employee from the employee’s wages ratably for the four-month period from January 1 – April 30, 2021. The Consolidated Appropriations Act extended the time for repayment to the end of 2021. Any payments received for employee Social Security taxes previously deferred will be accepted as timely if made by December 31, 2021. IRS Notice 2021-11 provides additional detail on the extension of time for repayment.

If an employee is not employed with the employer for the full year, the employer is still obligated to pay the total deferred taxes to the IRS. Interest, penalties and additions to tax will begin to accrue on January 1, 2022.

Q: Do we need to make all employees complete a new Form W-4?

A: There was a change in 2020 and it’s still in place for 2021.

Employees who have furnished Form W-4 in any year before 2020 are not required to furnish a new form. If the employee is a new hire, making changes to their existing withholding or filed exempt in 2020, the 2021 W-4 form will be required. (Learn more in our latest guide to the W-4.)

Q: Did the Social Security taxable wage limit change for 2021? 

A: Yes, the Social Security wage base increased to $142,800. The employer and employee share of Social Security tax remain at 6.2%; Medicare at 1.45%. An additional Medicare tax of 0.9% has been imposed on employee wages in excess of $200,000 in a calendar year.

Q: I’m receiving questions from employees about how the federal taxes will change for 2021, what can I provide?

A: The IRS encourages everyone to use the Tax Withholding Estimator to perform a quick “paycheck checkup”. Employers can utilize the IRS Tax Withholding Assistant tool (download in Excel) to calculate withholding based on employee elections on Form W-4.

Q: What changes did the IRS make to the federal income tax for the filing status in 2021?  

A: The standard deductions for 2021 are as follows:

  • Married couples joint filing: $25,100
  • Single/ Married filing separately: $12,550 
  • Head of Household: $18,800

Q: What changes did the IRS make to the federal income tax withholding tables?  

A: Rates remain the same as established by the TCJA (Tax Cuts and Jobs Act of 2017): 10%, 12%, 22%, 24%, 32%, 35%, 37%. The income range for each rate bracket has been adjusted upwards slightly for inflation. For those taxpayers with withholding based on a prior year W-4, the allowance amount has been increased to $4,300.

Q: Are there any changes to the supplemental wage rate?

A: For those receiving up to and including $1M in supplemental wage payments in 2021, the rate remains the same as 2020 at 22%.

For those receiving an amount that exceeds $1M or more in supplemental wage payments in 2021, the rate remain the same as 2020 at 37%.

Q: What changes were made to the qualified fringe benefits?

A: For tax year 2021, qualified fringe benefits are set at:

  • Qualified parking: $270.00 per month
  • Commuter highway vehicle and transit pass (combined): $270.00
  • Adoption assistance: $14,440

Q: What are the qualified retirement contribution limits for 2021?

A: For 2021, qualified retirement contribution limits are as follows:

  • Elective deferral limits for the 401(k), 403(b) and 457 plans remain at $19,500
  • Catch-up (age 50 or older) remains at $6,500
  • Annual compensation limit increase to $290,000 for 401k, 403(b), SEP and profit sharing plans 
  • Defined benefit plan limits remain at $230,000
  • The contribution limits for SIMPLE plan remains at $13,500
  • The SIMPLE catch up limit remains at $3,000

Q: What are the 2021 HSA and FSA limits?

A: The Health Savings Accounts contribution limits have risen slightly:

  • Self-only: $3,600
  • Family: $7,200

HSA catch- up contributions (age 55 or older) are limited to $1,000. FSA limits remains at $2,750. Additionally, Cafeteria plans allow a carryover of $550 in 2021.

Q: Did any states change their minimum wage?

A: Yes, over 20 states have a change in minimum wage for 2021. Most changes have an effective date of January 1, 2021, but some don’t kick in till the second half of the year. To help business track these and future rises, Paycor provides a comparison chart with complete 2021 state minimum wage rates. Remember, businesses must always select the highest of the federal state and local minimum wage applying in your jurisdiction.

Q: What trends are you seeing in state withholding?

A: There have been normal changes to withholding tables based on inflation or annual changes to standard deduction or allowance amounts. Unlike 2020 with the release of the new IRS form W-4, there have been no major changes to state calculations.  

Ohio released new 2021 withholding certificate.

Rules regarding state withholding for remote workers are subject to special exceptions for temporary changes in work location due to the pandemic or state executive orders.

Q: What do we need to know about the states that have enacted Paid Family and Medical Leave with a payroll tax component?

A: There are several states with new paid family leave legislation to be aware of:

  • Connecticut has a new state paid family leave program for 2021. This is funded by employee withholding tax of 0.5% on wages up to the Social Security wage limit of $142,800.  
  • Massachusetts, Washington, California, and DC have programs at the same contribution rates as 2020.
  • Massachusetts employees are eligible to collect benefits beginning January 1, 2021.
  • New York Paid Family Leave contributions for employees in 2021 are 0.511% of an employee’s gross wages each pay period with a maximum annual contribution of $385.34. 
  • New Jersey – FLI rate remains .0028; wage base increase to $138,200.
  • Note: Colorado and Maine also have laws but without payroll tax component; only benefit accruals are affected.
  • Oregon has passed a Paid Family and Medical Leave  bill, scheduled to go into effect 1/1/2022.

Q: Are there new local withholding taxes in 2021?
A: New (and unique) local taxes in 2021 include:

  • Seattle, WA: Tax is measured by “the payroll expense of the business” times a rate that varies based on the business’s total Seattle payroll expenses; this applies to employees making $150,000 or more in the city limits of Seattle. (NB: The tax is currently being challenged in the Washington courts by Seattle businesses and the Seattle Chamber of Commerce.)
  • Eugene, OR: Payroll tax is paid by employers, employees, and self-employed persons. Employee withholding is based on hourly rate of pay.
  • Multnomah County, OR: Payroll tax to fund preschool in Portland area; assessment of 1.5% tax on taxable income of more than $125,000 for single filer and $200,000 for joint-filers; with increases for incomes over $250,000 for single filers and $400,000 for joint filers. Withholding is voluntary for employers in 2021, and mandatory beginning 1/1/2022.
  • City of Portland, OR: Portland passed a payroll tax of 1% on taxable income above $125,000 for individuals and $200,000 for those filing jointly. Withholding is voluntary for employers in 2021, and mandatory beginning 1/1/2022.

Have More Questions?

Paycor creates HR software for leaders who want to make a difference. If you have more payroll questions, don’t worry. Our technology comes with dedicated support from HR experts, who ensure our product is always up to date with the latest payroll compliance legislation.