With a new year comes a new set of rules that could bulk up or slim down your 2020 pocketbook.
From adjusted IRS withholding tables that could change take-home pay and help taxpayers avoid costly penalties, to minimum wage increases in 25 states, to amended overtime pay requirements, now is a good time to consider whether the changes could impact your financial goals.
On Dec. 5, the federal government issued a new, more detailed, version of Form W-4, also known as the Employee’s Withholding Allowance Certiﬁcate. The update stems from the 2017 Tax Cuts and Jobs Act (TCJA), which among other changes to the Tax Code, altered federal income tax rates and brackets starting in 2018, and in turn, shifted IRS withholding tables.
“This is essentially a delayed reaction to the TCJA that took effect in 2018,” Pete Isberg, vice president of government relations for ADP, said. “Income tax withholding essentially has undergone a very major overhaul for 2020 that could be a source of confusion.” The new form is longer and requires more input from employees, and adds a new filing status option for head of household filers.
The most significant change is that the IRS has done away with the “allowances” method to estimate withholding.
“Withholding allowances have been the basis for payroll withholding forever,” Isberg said. “So that's going to cause a little confusion.”
Another change will impact taxpayers with multiple jobs and married filers filing jointly.
“The tax tables just assume that spouses earn about the same amount, and it divides the standard deduction and the tax brackets kind of equally between two jobs,” he said. The new section replaces a 9-step process previously used to estimate withholding for multiple income households.
Also changed is an elective section allowing taxpayers to withhold for separate sources of income, such as interest, dividends, and retirement income.
Taxpayers who have previously submitted a Form W-4 and have not sent in the new version are not required to update or replace their submission. However, penalties for underpayments resulting from outdated form calculations will be assessed for the first time beginning with filings for the 2019 tax year. Those who begin new employment after 2019, or wish to adjust their withholding, must complete the new form.
On its website, the IRS reminds taxpayers to recheck withholding again at the start of 2020. A reassessment is especially important, the agency says, for those taxpayers who reduced withholding in 2019, or did not file a new Form W-4 for 2020. A calculator to estimate withholding is also provided on the agency’s website.
One of the most sweeping changes for 2020 income earners is estimated to impact at least 1 million of the state’s “gig” economy and freelance workers, reclassifying them from independent contractors to employees. The controversial law mandating the change, State Assembly Bill 5, passed by the state’s legislature in 2019 and effective Jan. 1, 2020, is estimated to cover more than half of the state’s independent contractors. That means employers will be required to provide benefits such as paid sick leave, break time, minimum wage, and work injury compensation, as well as observe their right to unionize.
The law, widely publicized for its debated application to Uber (UBER), Lyft (LYFT), and other ride-hailing drivers currently categorized as independent contractors, is estimated to drive up costs for companies as much as 30%.
A study from the University of California Berkeley determined that under the new law 64 to 91% of all California workers whose main employment comes from independent contract work will be covered by the law’s “ABC” three-part test and therefore may be required to be reclassified as employees.
“It’s going to be really difficult to have anybody help you in a practical respect without treating them as an employee, even if they're short term,” Isberg, told Yahoo Finance. For employers, “a hire, just to help out during the holidays, or even for one day, you might not be able to do that going forward, which will make things more difficult for businesses.”
The new law will also affect individual entrepreneurs who operate as a small businesses.
“Maybe a one-man shop, the tradesman that registers on an online platform and makes his services available, and people hire him through that platform — it’s going to be more difficult for that person to get jobs in California, for now,” he said.
California’s bold legislation has already paved a path East.
“That is sort of a trend,” Herbert said, explaining that similar bills are actively being debated in New Jersey and New York, where they have established labor union support. “New York, we expect, is absolutely going to come out with something in 2020 along the same lines.”
Such laws will help workers looking for benefits including health coverage and retirement plans, according to Herbert. Still, he said, the laws could slow the hiring processes, increase business-owner liability, and raise questions concerning benefits.
Businesses affected by the law are not letting it go into effect without a fight. Uber, Lyft, and DoorDash have pooled $30 million each in a $90 million ballot initiative to fight the application AB5. According to the law’s ABC test, all individuals who provide labor or services in exchange for compensation, must be classified as employees, unless the employer can demonstrate that the individual’s work 1) is free from the control and direction of the hiring entity; 2) is outside the usual course of the hiring entity’s business; and 3) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
In 2020, the maximum allowed employee contribution for retirement savings plans including 401(k)s, 403(b)s, most 457 plans, as well as federal government’s Thrift Savings Plan, will increase to $19,500 from $19,000. That means workers can defer income tax on an additional $42 per month.
Also increasing are catch-up contribution limits for retirement plan participants who are over the age of 50. In 2020, maximum catch-up contributions boost to $6,500, from last year’s limit of $6,000. “SIMPLE” retirement account contribution maximums also get a boost to $13,500, up from $13,000 in 2019.
Contribution and income limits are also changing for Individual Retirement Arrangements (IRAs). Filers covered by a workplace retirement plan are subject to new phase-out income ranges for deductions based on contributions to traditional and Roth IRAs. The ranges are listed here on the IRS’s website. Filers who are neither personally, nor through their spouse, covered by a work retirement plan are not subject to the phase-out limitations.
Twenty five of the nation’s states are requiring their employers to boost minimum wages starting Jan. 1, 2020. And according to The Employment Policies Institute, 32 local hikes across the country will also go into effect.
The largest state percentage increases will take place in Illinois (21.21%), which will see two increases over the course of 2020 that boost minimum hourly wages from $8.25 to $10, New Mexico (20%), which is moving from $7.50 to $9, Washington state, from $12 to $13.50 (12.5%) and New Jersey, from $8.85 to $11 (10%).
The federal minimum wage for 2020 is $7.25 per hour, a threshold that has not changed since July 2009. Some states carve out exceptions to minimum wage rules for tipped workers and employers whose annual income falls below certain amounts. Certain municipalities have also adopted minimum wages above state requirements.
Studies that model minimum wage increases have varying conclusions predicting their domino effect. Congressional Budge Office (CBO) research estimated that gradually upping the federal minimum wage to $15 by 2025 would increase wages for approximately 17 million U.S. workers. It also estimated that the scenario would result in job losses for as many as 1.3 million U.S. workers in 2025.
A separate report published in 2017 by The Economic Policy Institute concluded that a gradual increase to a federal minimum wage of $15 by 2024 “would directly or indirectly lift wages for 41.5 million U.S. workers, representing 29.2% of the wage-earning workforce.” The injection of $144 billion in additional wages, the study said in its summary, would help stimulate the economy and spur greater business activity and job growth.
Beginning in January, federal law will require employers to pay overtime to employees who earn less than $684 per week, or $35,568, annually. The level is an increase from 2019 which required overtime for employees who worked more than 40 hours per week and earned less than $23,660, annually, or $455 weekly. Under the Fair Labor Standards Act (FLSA)’s new requirement, which some people expect to be challenged on the grounds that the increase exceeded the Department of Labor’s authority, employers must reclassify workers as nonexempt who fall below the $35,568 threshold. In addition to the federal benchmark, some states require overtime pay for employees whose earnings exceed the federally mandated level.
Family & Medical Leave
The reluctance of the federal government to adopt a nationally mandated paid leave benefit has left the matter up to states, three of which are expanding coverage next year.
As of October 2019, Massachusetts employers are required to withhold payroll income under the state’s Paid Family and Medical Leave law.
The law’s benefits first become available to the state’s qualifying workers in January 2021. The contributions, a payroll tax totaling 0.75% of an employee’s annual income, funded about equally between employees and their employers, are pooled to provide temporary income replacement for parents of a newborn child, for individuals to care for themselves or family members facing serious illness, and individuals fulfilling military obligations. Up to 20 weeks of paid medical leave are offered for employees with serious health conditions that incapacitate them from work. Up to 12 weeks are offered for birth, adoption or foster care of a child, as well as for required Armed Forces service. Up to 26 are available for workers to care for a family member with a serious health condition.
Beginning Jan. 1, Nevada will mandate that employers with 50 or more employees provide 40 hours of paid time off per year to care for themselves or a family member.
Washington state’s new Paid Family and Medical Leave law goes into effect Jan. 1, for the first time providing eligible workers with up to 12 weeks of paid time off per year to recover from a major surgery, serious illness or injury, to receive treatment for a chronic health condition, or for inpatient treatment for substance abuse or mental health. Mothers who give birth are eligible for 16 to 18 weeks. Twelver weeks are permitted for child adoption as well as foster child care, or care for a family member facing illness or medical procedures. The program is funded through payroll deduction totaling 0.4% of the employee’s total gross wages up to the Social Security limit. Employers with fewer than 50 employees are exempt from the employer-paid portion. Employers with more than 50 employees can opt to cover the payroll deduction or require employees to fund 66.63% of the 0.4% contribution. Income replacement is based on a percentage of an employee’s typical weekly earnings, up to $1,000 per week.
Congressional House members voted to approve a provision of the National Defense Authorization Act (NDAA) offering federal employees 12 weeks of paid family and medical leave. House Oversight and Reform Committee Chair Rep. Carolyn Maloney, said Tuesday during a Committee hearing that the Senate had agreed to a pared down provision, permitting leave for parents caring for a newborn or adopted child, though excluding paid time off to attend to a family member’s medical care.
“Right now we are one of only two nations in the world that does not provide our workers with any form of paid family or medical leave: the U.S. and Papua New Guinea,” Committee Chair, Rep. Carolyn Maloney, said Tuesday during the hearing.
“Research shows that federal employees are paid more than comparable workers in the private sector,” Rep. Jim Jordan (R-OH) said during the hearing. “Before settling on a proposal that would take tax dollars from union workers in Ohio to pay for leave for already well-paid attorneys at the EPA or the Department of Labor, the Committee and the Congress should do some serious fact finding.”
State health insurance mandates
A trend towards penalizing taxpayers who fail to obtain health insurance is showing up at the state level. After the Trump administration dropped the so-called “individual mandate” from the Affordable Care Act, for the first time this year, state filers in New Jersey and the District of Columbia are required by law to disclose on their income tax returns whether they were covered by health insurance during 2019.
“[States] were very concerned about their health plans and decided that they were going to need to enact basically the same health coverage mandate at the state level,” Isberg said. “They'll have essentially the same penalties the federal law had.”
Isberg says other states are following suit.
“There are a handful of states like California, Rhode Island, that enacted basically the same law, but effective in January, 2020. Vermont is also out there with a similar law and Maryland is pretty close too,” he said.
California has also increased its state healthcare premium subsidy for residents who make less than 400% of the poverty level, and introduced state subsidy eligibility for residents who make between 400% and 600% of the poverty level. That means for the very first time, state subsidies are available for individuals making between $50,000 and $75,000.
“That’s a big deal to make it even more affordable — in 2019 there was no federal support and so many individuals were seeing massive costs for health insurance,” Herbert said.
In efforts to combat wage discrimination and close gender and minority pay gaps, a majority of states have enacted laws to protect equal pay.
Nineteen states have adopted statutes that prohibit employers from screening job applicants based on the applicant’s salary history.
Starting Jan. 1, New Jersey and New York will expand their salary history protections to apply to all employers. Earlier versions of the states’ laws applied only to state entity employers.
Cincinnati and Toledo are two municipalities also expected sometime in 2020 to implement a prohibition against pay history screening for employers with 15 or more employees.
This story was updated to clarify the University of California Berkley’s study estimated the percentage of independent contractors covered by AB5’s “ABC” test, however did not make a determination as to the percentage of such contractors that will ultimately be reclassified as employees.
Alexis Keenan is a New York-based reporter for Yahoo Finance. She previously worked for CNN and is a former litigation attorney. Follow her on Twitter @alexiskweed.