Understanding annual limits is crucial for accurate payroll management. Federal, state, and local tax agencies set specific annual limits for payroll deductions and taxes. In this article, we'll delve into the significance of these limits and how they impact payroll calculations. Stay updated to guarantee that your payroll procedures comply with regulatory standards.
Taxes
Several taxes come with limits that affect your net pay. Upon reaching these limits within a calendar year, you may see an increase in your take-home pay, or you might reach a threshold requiring additional taxes.
Both the employer and the employee are responsible for paying FICA, which is a combination of Social Security and Medicare taxes. They each pay Social Security taxes at a rate of 6.2% each until the employee reaches the wage of $168,600 in 2024, which is an increase from the 2023 limit of $160,200.
Both the employer and employee pay Medicare taxes of 1.45% each on all wages paid. The additional Medicare threshold is $200,000, at which point the employee is required to pay an additional tax at a rate of 0.9%.
Find out more about Social Security limits here.
High wage earners and federal tax limits
When hiring an employee who has either reached or is nearing the wage base limits for FICA taxes, it's important to treat them like any other new hire. The Social Security limit is determined based on an employee's work with a single employer. This implies that even if an employee has already reached the annual Social Security limit with a previous employer, both you and the employee must continue withholding Social Security taxes on all wages paid under your employment until they reach the annual limit.
Deduction limits
Deductions play a crucial role in calculating an employee’s check. Various deductions, when appropriately configured, offer benefits to an employee's take-home pay. Pre-tax deductions are typically Section 125 plans for health insurance and deferred compensation for retirement contributions.
Retirement deduction limits
Deduction | 2023 Limit | 2024 Limit |
401(k) | $22,500 | $23,000 |
401(k) Catch-Up (50 and older) | $7,500 | $7,500 |
403(b) | $22,500 | $23,000 |
403(b) Catch-Up (50 and older) | $7,500 | $7,500 |
457(b) | $22,500 | $23,000 |
457(b) Catch-Up (eligibility determined by plan) | $7,500 | $7,500 |
457(b) Special Catch-up (eligibility determined by plan) | Up to $45,000 | Up to $30,500 |
Simple IRA | $15,500 | $16,000 |
Simple IRA Catch-Up (50 and older) | $3,500 | $3,500 |
Roth IRA | $6,500 | $7,000 |
Roth IRA Catch-Up | $1,000 | $1,000 |
Learn more about the amount individuals can contribute to their retirement savings in 2024 here.
Health deduction limits
Deduction | 2023 Limit | 2024 Limit |
HSA (self) | $3,850 | $4,150 |
HSA (family) | $7,750 | $8,300 |
HSA Catch-Up (55 and older) | $1,000 | $1,000 |
FSA (self) | $3,050 | $3,200 |
FSA - Dependent care (single, married file jointly) | $5,000 | $5,000 |
FSA - Dependent care (married filing separately) | $2,500 | $2,500 |
Unemployment wage base limit
The unemployment wage base limit represents the taxable wages that employers must compute and contribute towards unemployment taxes. The FUTA wage base limit stands at $7,000. Employers are liable to pay FUTA taxes on the first $7,000 of wages paid to each employee. This wage base limit resets annually on January 1.
The state unemployment (SUI) wage base limit varies from state to state, and in some cases, states may adjust the wage base limit on an annual basis.
Below are the SUI wage base limits for each state:
State | 2023 Wage Base Limit | 2024 Wage Base Limit |
$8,000 | $8,000 | |
$47,100 | $48,600 | |
$8,000 | $8,000 | |
$7,000 | $7,000 | |
$7,000 | $7,000 | |
$20,400 | $23,800 | |
$15,000 | $25,000 | |
$10,500 | $10,500 | |
$9,000 | $9,000 | |
$7,000 | $7,000 | |
$9,500 | $9,500 | |
$56,700 | $61,800 | |
$49,900 | $53,500 | |
$13,590 | $13,590 | |
$9,500 | $9,500 | |
$36,100 | $38,200 | |
$14,000 | $14,000 | |
$11,100 | $11,400 | |
$7,700 | $7,700 | |
$12,000 | $12,000 | |
$8,500 | $8,500 | |
$15,000 | $15,000 | |
$9,500 | $9,500 | |
$40,000 | $42,000 | |
$14,000 | $14,000 | |
$10,500 | $10,000 | |
$40,500 | $43,000 | |
$9,000 | $9,000 $20,000, for employers assigned with Tax Category 20. | |
$40,100 | $40,600 | |
$14,000 | $14,000 | |
$41,100 | $42,300 | |
$30,100 | $31,500 | |
$12,300 | $12,500 | |
$29,600 | $31,200 | |
$40,800 | $43,200 | |
$9,000 | $9,000 | |
$25,700 | $27,000 | |
$50,900 | $52,800 | |
$10,000 | $10,000 | |
$28,200 (Tier I) $29,700 (Tier II) | $28,200 (Tier I) $29,700 (Tier II) | |
$14,000 | $14,000 | |
$15,000 | $15,000 | |
$7,000 | $7,000 | |
$44,800 | $47,000 | |
$13,500 | $14,300 | |
$8,000 | $8,000 | |
$67,600 | $68,500 | |
$9,000 | $9,000 | |
$14,000 | $14,000 | |
$29,100 | $30,900 |
Employee state unemployment wage base limits
Three states require employees to pay for unemployment: Alaska, New Jersey, and Pennsylvania
When an employee working in Alaska or New Jersey hits the SUI wage base limit in a calendar year, no further tax deductions will be taken from their paycheck.
State | Wage Base Limit | Rate | Maximum tax |
Alaska | $49,700 (2024) $47,100 (2023) | 0.50 (2024) 0.51% (2023) | $248.50 (2024) $240.21 (2023) |
New Jersey | $42,300 (UI, WF) $161,400 (TD, FLI) | 0.125% 0.09% | $52.88 $145.26 |
Pennsylvania | Unlimited | 0.07% |
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FAQ
Can an employee request additional withholding specifically for Additional Medicare Tax?
No. However, if the employee anticipates owing for Additional Medicare Tax, they may request additional income tax withholding when they complete their W-4.
How do I stop FICA for an employee who has already reached the annual limit?
FICA limits are determined based on an employee's work with a single employer. When hiring an employee who has either reached or is nearing the wage base limits for FICA taxes, it's important to treat them like any other new hire.
How do I process a check to max-out a 401(k)?
Check out How to Make a Lump Sum 401K Contribution for details on preparing a check to max-out your 401(k).
Are there other taxes that have wage limits that may impact an employee’s net pay?
Several states have taxes for programs set up for Paid Family Medical Leave (PFML), State Disability Insurance (SDI), or Temporary Disability Insurance (TDI). These taxes can impact the employee’s net pay once they reach the wage base limits.
These states include California (SDI), Connecticut (PFML), Massachusetts (PFML), New York (PFL, SDI), Rhode Island (TDI), Washington (PFL), and District of Columbia (PFL).
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