2023 Tax Planning: The 3 Numbers All Employees Should Know

Before tax-return season sets in, putting your focus on your 2022 income, this is a good time to meditate on your tax planning for 2023. That includes the federal tax-related numbers for 2023 that are crucial for all employees, their paychecks, and their planning.

The IRS and the Social Security Administration annually adjust for inflation a myriad of key numbers in federal tax-law provisions—and in 2023, given the economic cycle we're in, some of these changes are bigger than in past years. However, it can be difficult to spot the adjustments that matter to you.

Some apply only to very high-net-worth executives and other super-wealthy people. For example, there's the federal estate-tax exemption (in 2023, $12.92 million for single taxpayers and $25.84 million for married joint filers). Others of interest mainly to administrators of corporate benefit plans and other experts (like us here at myStockOptions) 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 $150,000 in 2023.

This article clears away all that to focus your mind on the essential points for you. Below are the top three sets of tax figures in 2023 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

The Social Security tax (at a rate of 6.2%) applies to wages up to a maximum amount per year that is set annually by the Social Security Administration. Income above that threshold is not subject to the Social Security tax. (By contrast, the Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)

In 2023, the Social Security wage cap is $160,200, up from $147,000 in 2022. This means the maximum possible Social Security withholding in 2023 is $9,932.40. 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

If you’re an employee, your company withholds taxes from your paycheck according to the information on your Form W-4. Showing the federal income-tax brackets and their rates, 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. That number tells you whether the withholding as indicated on your W-4 will cover the total tax you will owe for 2023. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.

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 for this income. 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% does 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 2023 tax return you will file in 2024, pay estimated taxes during 2023, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall. Speak with a qualified tax professional, such as a CPA or Enrolled Agent, when you’re uncertain about the best approach to take.

If estimated taxes are the route you choose, know that due dates for quarterly estimated tax payments in the 2023 tax year are April 18, June 15, and September 15 of 2023 and January 16 of 2024. (The IRS routinely postpones these due dates for taxpayers in areas of the United States affected by natural disasters. See the IRS website section Tax Relief In Disaster Situations.)

3. Your Contribution Limit For Qualified Retirement Plans

In 2023, you can elect to defer up to $22,500 from your paychecks into qualified retirement plans, such as your 401(k). That annual limit increased from $20,500 in 2022.

The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $66,000 in 2023, a $5,000 increase over last year’s amount. If you are 50 or older, you can contribute an additional $7,500 per year, a limit that also went up in 2023.

The amount of compensation income that can be considered in the calculation for qualified deferrals grew to $330,000 in 2023. 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. For more on these plans, see the website myNQDC.com.

Inflation Adjustments For Health Savings Accounts (HSAs)

While not all employees have them, health savings accounts (HSAs) are also getting an increase in their pre-tax contribution limits for 2023 in response to inflation. HSAs are available only for high-deductible health plans.

The IRS has raised the yearly contribution limit for HSA self-only coverage to $3,850, up by $200 from last year, and for family coverage it is now $7,750, up from $7,300 in 2022. The limit for HSA catch-up contributions, available for people ages 55 or older, remains $1,000. With more companies setting up pre-tax payroll deductions for HSAs and matching employee contributions, these increases could be significant for many people as the cost of health care continues its relentless rise.

IRS Resources

Here are resources with more details on the many adjusted 2023 tax numbers:

• Revenue Procedure 2022-38 gives inflation adjustments in various income-tax-related provisions for 2023, which are also summarized in a more reader-friendly IRS news release.
• IRS Notice 2022-55 gives the annual adjustments in 2023 for various tax-qualified retirement plans.
• Revenue Procedure 2022-24 has details on the HSA contribution limits for 2023.

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