Companies and Employees Need to Prepare for Higher Payroll Taxes in 2017

Dear Friends and Clients,

As we near the end of 2016 we want to share an administrative note for 2016 W-2 processing for S Corporations, and two payroll tax changes for 2017–FICA which will become effective January 2017 and FUTA which is very likely to change for 2017.

Payroll Items for Year-End and 2017
Well, the new year is bringing higher tax to both employees and employers on the FICA front.  The wage cap will increase to $127,200 from the current $118,500, so an increase of $8,700 which is subject to a 6.2% tax rate. Here’s the Social Security Fact Sheet 2017 Changes.

This means the workers above this cap will pay an additional $539 in FICA and so will the employers compared to the 2016 amount.  The total maximum combined FICA tax is $15,772.80 per employee (this is the combined employee and employer).

While we don’t have a crystal ball, the betting line is that California will continue to be a credit reduction state for Federal Unemployment (FUTA).

That means the effective FUTA rate for CA employees (paid 100% by employers) is projected to be 2.7% of the first $7,000 of employee compensation per employee ($189.00 each).  Compare that with no credit reduction of $42.00 for each employee, we are paying an additional $147.00 per employee.  That can be a big hit to cash flow in January (of the following year), when the additional amount is due if you have a large employee base.

Self-Employed Health Insurance Deduction
Shareholders who own more than 2% of an S-corporation are required to report health insurance premiums paid on their behalf by the S Corporation on their W-2.  This amount is reported in Box 1, but is not subject to FUTA/SUTA or FICA/Medicare.  This amount is then deducted on the individual tax return (Form 1040).  It is important to note that the IRS can deny the deduction if the premium in not reported on the W-2.  Equally important is to get this data compiled and transmitted to the payroll service or your payroll department so it can be included in the appropriate earnings accumulations prior to finalization of the year end W-2’s and associated tax filings.

As always, please let us know if you have questions, comments, or may need assistance, please contact PBO at 858.622.1681 or


Scott Palka
CFA CPA CMA MBA, Pro Back Office Partner/Consulting CFO
Scott holds a Master of Business Administration from the University of Denver’s Daniels School of Business, a Bachelors’ of Science, with honors, from the University of Illinois, and an Associate of Science in Chemical Technology from the College of Lake County. Scott is a Chartered Financial Analyst, a Certified Management Accountant, and a Certified Public Accountant. During his career, Scott has led financings from $1 million to $370 million, provided merger & divestiture analysis, deal structure and execution, led several major financial and operational system implementations, and put six sigma process improvements into action. Scott has 4 kids and loves spending time with his family. He is an enthusiastic cyclist who rides for both fun and charity.