New numbers from IRS will let businesses get rolling with updates for 2023.
Cost-of-living adjustments for many items, such as fringe benefits, and tax information for 2023 are included in IRS Revenue Procedure 2022-38.
Here are the details:
How inflation will impact benefits
Currently, an employee can ask Payroll to deduct up to $2,850 per year as a contribution to a health flexible spending account (FSA). That amount is going up to $3,050 next year.
Your cafeteria plan may give employees a grace period or the chance to carry over unused FSA amounts (although not both). In the case of carryovers, the limit for 2023 will be $610 (up from $570 for 2022).
The monthly limit for qualified transportation fringe benefits (QTFBs) will increase for 2023.
The aggregate exclusion for transportation in a commuter highway vehicle and any transit pass will be $300 per month (up from $280). Likewise, for qualified parking, the monthly limit will be $300 (now, $280). If you offer QTFBs, Payroll may be able to help set up compensation reduction agreements to make the fringe benefit more convenient for employees.
The amount you can exclude from gross income under a qualified adoption program will be $15,950 (currently it’s $14,890). That amount is the same for a child with special needs.
The excludable amount begins to phase out for a taxpayer with a modified adjusted gross income of more than $239,230 (currently, $223,410). The amount is completely phased out at $279,230 (currently, $263,410).
Depending on your company size, you may be able to offer a qualified small employer health reimbursement arrangement (QSEHRA). Essentially, as one prerequisite, you can’t be an applicable large employer under the Affordable Care Act – i.e., you can’t employ more than 50 full-time employees including full-time equivalent employees.
In addition to size restrictions, IRS sets limits on the total amount of payments and reimbursements you can provide with a QSEHRA. You can’t exceed $5,850 (currently, $5,450). In the case of family coverage, the limit in 2023 will be $11,800 (currently, $11,050).
Some employers may contribute to medical savings accounts (MSAs) for their employees. The 2023 COLA affects the high deductible health plans associated with these accounts. Here are the numbers for MSAs:
- self-only coverage: the deductible range must be between $2,650 and $3,950, and the maximum out-of-pocket expenses have been set at $5,300, and
- family coverage: the deductible range must be between $5,300 and $7,900, and the maximum out-of-pocket expenses have been set at $9,650.
Your company may offer many different kinds of fringe benefits. Remember, they’re taxable unless they qualify for an exclusion.
Tax information for 2023
Other updates included in Revenue Procedure 2022-38 may prompt some employees to submit a new Form W-4 to Payroll for 2023.
The standard deduction, according to filing status, will be:
- Single and married filing separately: $13,850
- Head of household: $20,800
- Married filing jointly and surviving spouses: $27,700
The seven tax brackets (10%, 12%, 22%, 24%, 32%, 35% and 37%) will remain the same; however, the federal income tax rate tables have been adjusted for inflation, the Tax Foundation explained in 2023 Tax Brackets. For example, the top rate of 37% will apply to employees with taxable income that exceeds $578,125 if filing single and $693,750 if married filing jointly. That’s up from $539,900 and $647,850, respectively.