What’s contained in the federal budget proposal for FY 2024? For one thing, certain businesses would pay a higher income tax rate under the plan.
In fact, the rate would jump from 21% to 28% for C corporations.
The Treasury Department’s Green Book, released March 9, 2023, in conjunction with the Biden Administration’s $6.9 trillion federal budget, gives a reason for the proposed increase. It’s “an administratively simple way to raise revenue to pay for the Administration’s fiscal priorities,” according to the agency.
The General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals lays out another provision designed to reform business taxation: accelerating and tightening rules on excess employee remuneration.
Publicly held corporations generally can’t deduct compensation in excess of $1 million paid to certain employees and former employees, as provided under Sec. 162(m) of the Internal Revenue Code (IRC).
The rule applies to the following individuals:
- the CEO
- the CFO
- the three highest-paid non-CEO, non-CFO officers, and
- anyone who met these criteria for any previous taxable year (that doesn’t include taxable
years beginning before December 31, 2016).
That current list is set to expand, effective after December 31, 2026, to include the next five highest-paid employees.
The FY 2024 budget proposal would accelerate that effective date to taxable years beginning after December 31, 2023. Certain rules would be tightened as well – for example, some payments would be considered applicable employee remuneration even if the publicly held corporation didn’t make the payments directly but, rather, an affiliated partnership did.
Other tax provisions proposed in the federal budget deal with high-income taxpayers. Notably, the additional Medicare tax rate would increase after a certain threshold.
The reason for the rate increase, according to the Green Book? The Hospital Insurance Trust Fund is projected to be exhausted in 2028.
Currently, the additional Medicare tax rate is 0.9% for single and head of household filers reaching the $200,000-earnings threshold and joint filers reaching the $250,000-earnings threshold. As proposed, the rate would increase 1.2 percentage points (so, going up to 2.1%) for taxpayers exceeding $400,000 in earnings.
Also in the federal budget
The tax treatment of on-demand pay is another topic addressed in the Green Book.
With on-demand pay – sometimes called earned wage access – employees typically use mobile apps to access accrued wages before the regular pay cycle has ended. The payments are transferred to a bank account, pre-paid debit card or payroll card.
An ongoing point of concern – for regulators and Payroll pros alike – is whether employees with access to on-demand pay arrangements are in constructive receipt of their wages. Therefore, clarity is needed, the Treasury Department explains.
One solution would be amending Sec. 3401(b) of the IRC to provide that the payroll period for on-demand pay arrangements would be considered weekly, even if employees have access to their wages more frequently.
That’d be good news for businesses from an administrative and financial perspective, helping to ensure the timely withholding and depositing of employment taxes.