US Federal Tax Changes That Can Impact Your 2023 Production Budget

2023 will introduce a handful of important Federal tax changes with the potential to substantially affect your production budgets. To make sure you're set up for success, I'll give you the scoop on what's changing and what's staying the same.

First, let's talk about what's changing.

Social Security wage base is going up in 2023

The social security wage base is going up from $147,000 to $160,200 in 2023. This is the biggest social security wage base bump I’ve ever seen, and it’s happening because inflation is impacting every aspect of the economy.

So, how do you calculate the increase in your budget? In 2022, we suggested budgeting $8,853.60 for your social security wage base. In 2023, you need to budget $9,932 (an increase of $1,078) for employees making $160,200 or more to adjust for the difference.

State unemployment interest: Some states will pay more

Any state that has yet to fully repay unemployment funds borrowed during the pandemic (when it ran out of funds to pay unemployment claims) will pay more in federal unemployment insurance tax (FUI) in 2023. This year's offenders include California, New York, Connecticut, and Illinois.

Employers in these states will pay an additional 0.6% in FUI, up from .03% in 2022. Why the increase? An additional 0.3% is added to the interest payment for each year money borrowed from the fed is not repaid in full.

What does this mean for your budget? As mentioned above, employers in these four states will pay an additional 0.6% per employee, which equates to $42. So, if you are hiring California, New York, Connecticut, or Illinois residents, be sure to budget for both regular FUI and for what EP has nicknamed FUI-2. In 2023, that works out to $84 dollars for every employee earning a wage base of at least $7,000.

The Virgin Islands also still owes the federal government money borrowed for unemployment claims from the great recession, so they’ve been adding on 0.3% for many years. As a result, FUI-2 will be 3.9% for Virgin Island-based employees in 2023.

Federal mileage changes

Federal mileage went from 58.5 cents to 62.5 cents on July 1, 2022, so be sure to include the new rate in your 2023 budgets. Also, if you provide a qualified transportation fringe, rates are going up from $280 to $300 a month for both parking and metro passes.

Changes to 401k contribution maximums

If you offer a 401k match to your employees, be aware that 401k deferral maximums are going up to $22,500 in 2023—from $20,500 in 2022. Employees over the age of 50 also get a bonus $7,500 bump in deferral maximums, allowing them to set aside as much as $30,000 next year. Make sure to reflect these changes accordingly in your production budgets next year.

What’s not changing in 2023?

We covered all the federal tax changes to watch for next year. Now, let’s talk about some things that will stay the same:

• Medicare tax will be unchanged (still 1.4%), and there will be no wage base increase for employers. However, employees earning over $200,000 will be taxed at 2.35% – so keep that in mind as you set up payroll.
• Federal Unemployment Insurance tax (FUI) also remains unchanged at a wage base of $7,000 and an effective tax rate of 0.6%. That works out to be $42 for every employee earning a wage base of at least $7,000. Though as discussed above, four states (California, Connecticut, New York, and Illinois) plus the Virgin Islands, have increased FUI rates due to unpaid, overdue federal borrowing. If you missed that bit, scroll to the top of the article for more details.
• There are no new e-verify states for 2023. As a reminder, e-verify is currently required in Alabama, Arizona, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Utah.

Notable legislation: Big 2022 initiatives

Here are a few major legislative motions we had our eyes on at EP throughout 2022:

1. The Inflation Reduction Act, which was passed and signed into law in 2022, had no material impact on EP or the industry. However, we’ll keep an eye on any future inflation-related legislation and will let you know if and when any changes that impact your accounting and budgets come into play.
2. The Federal Unemployment Insurance Reform Bill was a hot topic as we muddled our way through the pandemic. However, inflation has introduced more pressing issues, and the bill lost its steam. I don't anticipate we'll see this one come back to life.
3. The Federal Multistate Taxation Bill has a similar story. Though there was a big push for multistate taxation legislation during the pandemic, more pressing issues pushed this one aside. Again, I don’t anticipate it’ll be back. 

Other Federal considerations for 2023

People still really dislike the not-so-new W-4. If you’re struggling to navigate the form, check out this post I wrote on how to fill out the new form. I’ll write a post that addresses any changes on the 2023 version of the W4 as soon as the new form comes out.

This year, I’ll also go into more detail on how to use the IRS W-4 estimator tool. This handy calculator asks for some information from your 1040 tax form and a recent pay stub, then tells you exactly how to fill out your W-4. You can figure out the most accurate withholding amount based on whether you prefer to break even or get a refund at tax time.

Putting a bow on 2022

To wrap up 2022, it’s a great idea to tidy up your books by verifying all the details in your accounts payable vendor files.

The most common issues we see with vendor 1099 reporting are:

• Missing or invalid company tax ID 
• Missing or Invalid basic Vendor Tax Information (name, tax ID number, or address) 
• Expired tax codes in your accounting software 
• A vendor set up with both a SSN and an EIN

Taking the time to do this now can save you time and trouble in 2023!

EP has you covered

That’s all you need to know for now, but as always, we’ll keep you posted on any legislative changes that impact your production books and will continue to provide updates throughout the year. If you have any questions, please don’t hesitate to reach out to our payroll tax team at support@ep.com. We’re happy to help.

For more information about these changes, as well as a look at changes coming at the state level, check out my recent Master Series webinar: Budgeting for 2023: Federal, State, and Incentive Considerations.