Checkpoint Payroll Update recently talked with Susan Lubow, partner at BakerHostetler and co-chair of the firm’s national Employee Benefits and Executive Compensation Group, to discuss the large increase in the 2023 Social Security wage base limit and planning for 2023.
On October 13, 2022, the Social Security Administration (SSA) announced a $13,200 increase in the Social Security taxable wage base from $147,000 to $160,000 in 2023. Next year’s notable wage base increase is significantly greater than the wage base forecast by the SSA’s Office of Chief Actuary in June 2022 and means that many employers will pay up to $818.40 more in payroll taxes in 2023.
What is Social Security tax?
Social Security (Old-Age and Survivors Insurance and Disability Insurance) is financed through a payroll tax where employers and employees each pay 6.2% of wages up to the annual taxable wage base (self-employed pay 12.4%). Social Security tax is one component of employment taxes, which also include federal income tax withholding, Medicare tax, Additional Medicare tax, and Federal Unemployment Tax Act (FUTA) tax. Employers make deposits and file reports to the IRS to account for these taxes.
Payroll is expensive for a business.
In general, payroll is the greatest expense for a business. As attorney/author Barbara Weltman points out in an August 22, 2019, Small Business Administration (SBA) blog post, the cost of payroll involves multiple components from a salary, to taxes (federal, state, and possibly local), and benefits, which can add up. As 2022 comes to a close, several businesses are feeling the pinch of high inflation and other economic factors, which have resulted in layoffs. Some economists have said a recession is on the horizon for 2023.
Legal expert offers guidance.
Employers looking to add talent to their business or make other costly business decisions next year may wish to consider and forecast for the potential liability. Checkpoint Payroll Update recently talked with Susan Lubow, partner at BakerHostetler and co-chair of the firm’s national Employee Benefits and Executive Compensation Group, to discuss the significant increase in the 2023 Social Security wage base limit.
Not much buzz about the increase.
On the topic of the Social Security taxable wage base increase, Lubow admits, “We have not heard much directly from employers or the payroll industry on the increase in the Social Security taxable wage base.” She notes that, “Employers have been more concerned with other employee benefit compliance issues and employee turnover.”
Things may change next year.
However, Lubow said that recent economic trends and forecasting for a possible recession next year could result in employers beginning to “focus on any additional spending, including Social Security costs.” Lubow points out that next year’s increase affects workers with wages above the current Social Security wage base limit of $147,000, which, for most employers, will not affect a large percentage of their workers from a tax liability perspective. According to SSA data from August 2021, around 6% of employees have wages above the Social Security taxable wage base.
“Employers might…carefully determine the likely impact on their payroll costs, but may also keep in mind that a number of tax thresholds are changing for 2023,” Lubow advises.
Are more large wage base increases expected?
If the United States slips into a recession in 2023, could there be another large increase in the taxable wage base for 2024? “Whether employers should expect continued large increases depends on a number of factors, including wage growth and inflation,” Lubow said. “But the situation is complex because wage growth can lag behind inflation, and employers may be dealing with a recession next year.” She notes that what makes it more complex is the SSA uses an average wage from the prior two years “when determining the taxable wage base.”
In preparation for uncertain times, Lubow says, “Employers should continue to carefully monitor their finances and should consider how to best weigh employee-retention efforts and hiring against the potential recession.” She also advises consulting with tax and legal advisors to get the full picture.
Legislative Social Security changes.
Lubow said that both the House of Representatives and Senate have introduced legislation this year “that, if passed, would impact Social Security.” She explains that several proposals focus on providing additional funding for the Social Security program with tax increases “to protect the program’s ability to pay benefits in full and on time.” According to the 2022 annual report of the Social Security Board of Trustees, the surplus in the trust funds that disburse retirement, disability, and other Social Security benefits will be depleted by 2035.
Lubow explains that the existing proposed legislation for Social Security tends to be “politically one-sided” and with the current Congressional polarization, “no particular proposals stand out.” She adds, “This is especially true moving forward because Republicans will control the House of Representatives in 2023, while Democrats will keep control of the Senate.” The 2022 mid-term elections on November 8, 2022, resulted in the Republicans gaining control in the House with the necessary 218-seat majority.
The SSA houses a webpage that contains proposals to change the program.
Communicating changes to employees.
When it comes to alerting employees of changes involving wages, Lubow feels, “It is generally good practice for employers to communicate with their employees, when possible, particularly where pay is concerned.”
Methods of communication can depend on a company’s employee population and the variety of different methods to convey the message. “But generally speaking, electronic communications describing the change—briefly and with clear language—might be useful to employees,” Lubow says. She also advises the alert include information regarding the increase in income tax brackets next year.
Social Security change for affected employees.
The increase in the Social Security taxable wage base in 2023 could be different for employees. For some employees, the impact of the Social Security taxable wage base “might be mitigated by the increase in the tax brackets,” Lubow says. She advises employers to avoid “offering specific advice and should instead direct employees to their tax advisors.”
Lubow points out that an employee alert of tax changes provides an opportunity for employers to also “remind employees of any savings options under employer-sponsored retirement plans or to highlight other employee benefits offered (or even improved) in spite of rising inflation and the increased taxable wage base.”
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