Tax-return season for 2021 income has officially begun. However, don’t forget to look ahead and consider your tax planning for 2022. Key numbers in tax-law provisions are adjusted for inflation at the start of each year. Some of these adjustments are important for employees, their paychecks, and their planning.
As many tax-code sections are annually modified for inflation, it can be hard to spot the adjustments that matter to you. Some apply only to super-wealthy executives and other individuals, such as the federal exemption for estate tax (in 2022, $12.06 million for single taxpayers and $24.12 million for married joint filers). The more obscure adjustments are chiefly of interest only to administrators of corporate benefit plans and other experts (like me) who keep track of this stuff. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans (ESPPs) and 401(k) plan non-discrimination testing, is $135,000 in 2022.
So let’s cut through the clutter and focus on the essential points. Below are the top three sets of tax figures in 2022 that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings.
1. The Social Security Wage Base
Social Security tax (6.2%) applies to wages up to a maximum amount per year set annually by the Social Security Administration. Income above that threshold is not subject to Social Security tax. (By contrast, Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)
In 2022, the Social Security wage cap is $147,000, up slightly from $142,800 in 2021. This means the maximum possible Social Security withholding in 2022 is $9,114. Once your income is over the wage cap and you’ve maxed out the withholding, you’ll see 6.2% more in your paycheck!
2. Your Income-Tax Bracket And Withholding
The table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate (i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket). This number tells you whether the taxes withheld according to your information on the revised Form W-4 will cover the total tax you will owe for 2022. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.
The 7 income-tax brackets in 2022.
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Need To Pay Estimated Taxes?
Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate. Instead, they apply the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly supplemental income in excess of $1 million).
As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% may not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2022 tax return you will file in 2023, pay estimated taxes during 2022, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall.
3. Your Contribution Limit For Qualified Retirement Plans
In 2022, you can elect to defer up to $20,500 from your paychecks into qualified retirement plans, such as your 401(k). That annual limit increased in 2022 from $19,500, where it had been for several years.
The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $61,000 in 2022, a $3,000 increase over last year’s amount. If you are 50 or older, you can contribute an additional $6,500 per year.
The amount of compensation income that can be considered in the calculation for qualified deferrals rose to $305,000 in 2022. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.
Want To Defer More Income?
Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan or other name. For more on these plans, see the website myNQDC.com.
IRS Resources
Here are resources with more details on the many adjusted 2022 tax numbers:
- Revenue Procedure 2021-45 gives inflation adjustments in various income-tax-related provisions.
- IRS Notice 2021-61 and an IRS table give the annual adjustments related to various tax-qualified retirement plans.