Inflation continues to dominate the headlines, and it’s surely having an impact on your payroll costs. As you begin to work on your 2024 budget, be sure to take payroll changes into account. These changes result from increased wages, higher payroll taxes, and other factors. Here are some things to think about now.
New wages
You may be required to increase employee wages due to minimum wage increases that go into effect on January 1, 2024. While the basic federal minimum wage has not been adjusted and is the applicable rate in 7 states, there’s a hike in the federal minimum wage rate for federal contractors. Most states have their own higher rate, which takes precedence over the lower federal rate, and some of these state and local rates are increasing on January 1, 2024. If you have remote workers, you must apply the rate in effect in their location. Check with your state’s rate now to determine the applicable rate for the coming year (some increases are effective on January 1, while others have effective dates later in 2024). There may also be rates for counties and cities.
Do you usually have a lot of overtime pay for your staff? In making your 2024 budget, take into account a U.S. Department of Labor proposal to increase the threshold at which certain employees are exempt from overtime rules (i.e., more employees would be subject to the time-and-a-half overpay pay rule).
Even if minimum wages and the overtime pay rule increases aren’t issues for you, if you’re trying to help your staff at least keep pace with inflation or simply reward them for work well done, it’s going to cost you. WorldAtWork projected compensation increases for 2024 of about 3.5%. But the amount by which you increase compensation for your staff depends on many factors besides inflation, such as the cost of living in your area, what your competitors are paying, and what you can afford.
Recognize that increasing wages also means higher payroll taxes. Payroll taxes on employers include:
- FICA (explained below).
- FUTA (the federal unemployment tax). Because this tax based on wages capped at up to $7,000 per employee, the cost won’t change for 2024 unless you add employees to your staff.
- State unemployment tax. This tax typically is based on a company’s experience (how many unemployment claims are made against it). The rate may change from year to year. Check with your state unemployment division if you have not yet received a notice about your 2024 rate.
And there’s also workers’ compensation, the cost of which reflects your payroll. The good news is that workers’ compensation costs are expected to drop in some locations (e.g., Oregon) in 2024, although they are increasing in others (e.g., Washington). Check with your state or insurance carrier.
New employee benefits plans
To attract and retain employees during this tight labor market, you may want to introduce or increase your plan offerings. Consider:
- Medical benefits. Health insurance costs for employers are set to rise dramatically in 2024 because of “medical inflation, soaring demand for costly weight-loss drugs and wider availability of high-priced gene therapies.” Small employers have many options to help employees have health coverage without busting the business’ budget, such as high-deductible plans combined with health savings accounts, qualified small employer health reimbursement arrangements (QSEHRAs), and some other reimbursement arrangements.
- Dependent care benefits. To bring employees back to the workplace, you may need to offer a dependent care assistance plan. This can be financed through employee contributions made on a pre-tax basis. Alternatively, the company may pay the cost, which is capped at $5,000.
- Retirement savings options. If you have a qualified retirement plan with employer contributions—as the only plan contributions or contributions that are tied to employee contributions—employee compensation will determine what it costs you for the year. Be sure to check new retirement plan rules taking effect in 2024 and factor in the cost of changes to you. If your company doesn’t have a qualified retirement plan, you may want to adopt a new option: SIMPLE 401(k), which is a plan for small employers that is funded entirely by employee contributions. If you don’t have a plan, you may be required by your state to enroll employees in its Secure Choice Savings Program or similar program (about a dozen states have them) and your company is not exempt. Like SIMPLE 401(k)s, contributions to the plan are made by the employee, but the set up may mean some additional administrative costs.
New Social Security tax wage base
FICA, which is comprised of Social Security and Medicare taxes, is a fixed rate: 7.65% on the employer as well as an equal rate on the employee. However, of FICA, 6.2% is the Social Security portion, and it applies only to taxable compensation up to a wage base that adjusts annually. In 2024, it will be $168,600, which is up from $160,200 in 2023. Companies that have employees earning more than the former wage base will pay an additional amount in 2024.
The 1.45% portion of FICA for Medicare taxes applies to all taxable compensation; there is no wage base cap.
Conclusion
Be sure you’ve adjusted your budget for 2024 to account for the added payroll costs you expect to incur due to higher salary and wages paid to employees, new or additional fringe benefits, higher payroll taxes, and higher administrative costs related to payroll. Project whether you expect to expand your staff in 2024, which will also add to your budget. And monitor law changes on a federal, state, or local level that may increase your administrative or tax costs for payroll.
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This article, "Preparing for Payroll Costs in 2024" was first published on Small Business Trends