The Internal Revenue Service (IRS) announced the annual adjustments to the standard deduction and tax brackets for the 2023 tax year. The IRS defines the standard deduction as a precise dollar amount that reduces the amount of income on which you’re taxed. A standard deduction consists of the sum of the basic standard deduction and any additional standard deduction amounts for age and blindness. The tax adjustments for 2023 are increased from 2022 in response to ongoing inflation. Continue reading to understand how the adjustments impact you and your employees.
The Annual Adjustments For 2023
The 2023 standard deductions for personal income taxes apply to the following:
- Individuals: $13,850 in 2023, representing a $900 increase
- Head of household: $20,800, a $1,400 increase
- Married filing jointly: $27,700, a $1,800 increase
In addition, the new tax brackets for personal income taxes apply as follows:
- 10%: all income below $11,000 individual / $22,000 married
- 12%: $11,000 individual / $22,000 married
- 22%: $44,725 individual / $89,450 married
- 24%: $95,375 individual / $190,750 married
- 32%: $182,100 individual / $364,200 married
- 35%: $231,250 individual / $462,500 married
- 37%: all income above $578,125 individual / $693,750 married
Capital gains taxes have been adjusted as well. Capital gains are the profits you make when you sell a stock, real estate, or other taxable assets that increase in value while you own it. It’s based on profit and depends on the tax bracket. The capital gains brackets for 2023 are:
- 0%: All earning below $44,625 individual / $89,250 married
- 15%: $44,625 individual / $89,250 married
- 20%: $492,300 individual / $553,850 married
For in-depth details regarding the 2023 adjustments, click here.
What Your Employees Should Know
The new tax brackets apply to all earnings starting January 1st, 2023. As an employee, you must be provided with the resources necessary to make the right decisions. The IRS provides a tax withholding estimator that assists individuals in determining if they have too much federal income tax withheld, which could reduce their take-home pay. Alternatively, it can help employees with additional income sources to decide whether to withhold more or make an estimated tax payment to avoid a tax bill. Employees can also submit the IRS Form W-4 to their HR or payroll department to ensure the correct federal income tax is being withheld.
What This Means For Business Owners
If you’re a business owner, it’s essential to understand the tax bracket adjustments and standard deductions. Paycheck withholding amounts and quarterly estimated tax payments can affect an employee's income level subject to a higher tax bracket. In addition, the following could impact your employees’ decisions:
- Determining how much salary to defer into a traditional 401(k) plan or a health savings account
- Choosing if they want to participate in a nonqualified deferred income plan (if applicable)
Utilize GMS' Payroll Tax Management Services
Tax planning can be complicated, and you shouldn’t do it alone. Payroll tax filing requirements are complex and ever-changing. Filing incorrectly can result in costly penalties. When outsourcing your payroll tax management to a company like GMS, your business will benefit in various ways. Do what’s best for you and your employees as we approach the new year. Contact us today to learn more.