Happy New Year from your friends at Mize CPAs! We hope you find this monthly newsletter about payroll useful for your business. As always, if you have questions, please reach out to your Mize payroll professional.

New Exempt Salary Thresholds Coming in 2024

Last September, the Department of Labor (DOL) announced a proposed increase in the salary threshold that would determine whether an employee can be exempt from overtime pay. Currently, that threshold is $684 per week, or $35,568 per year. The proposed threshold is $1,059 per week, or $55,068 per year.

The comment period for the DOL proposal ended in early November 2023, and a new ruling is anticipated potentially in April, 2024 (according to the DOL’s legislative agenda announced in December). If past experience is any indication, there will probably be legal challenges to the new threshold. However, now is a great time for employers to review pay rates for their salaried employees to determine where they fall in relation to the proposed threshold, in order to plan for any changes.

Employers should also be aware that salary levels aren’t the only determining factor in whether an employee can be exempt from overtime. The employee’s job duties must also fall under the Administrative, Executive, or Professional guidelines.

We will keep you posted once a final rule has been announced.

US Department of Labor (DOL) Announces Final Rule on Determining Independent Contractor Status

Whether an individual is an employee or an independent contractor has far-reaching implications on minimum wage, eligibility for overtime pay, payroll taxes, and worker protections. The Fair Labor Standards Act (FLSA) does not define “independent contractor.” Courts have held that, under the FLSA, the question is whether the worker is economically dependent on the employer for work (and is thus an employee) or is in business for themself (and is thus an independent contractor). Independent Contractors play an important role in the economy and are commonly referred to by different names, including independent contractors, self-employed individuals, and freelancers.

The new rule, which takes effect March 11, 2024, rescinds the 2021 rule and reverts back to standards and guidelines used in case law for decades. There is no single rule that determines whether an individual is an independent contractor or employee for purposes of the FLSA, but rather the facts and circumstances of a situation are reviewed to determine if the worker is economically dependent on an employer. The final rule analyzes six factors in the “economic reality test”, including:

1. opportunity for profit or loss depending on managerial skill;
2. investments by the worker and the potential employer;
3. degree of permanence of the work relationship;
4. nature and degree of control;
5. extent to which the work performed is an integral part of the potential employer’s business; and
6. skill and initiative.

More information can be found in the DOL’s Small Entity Compliance Guide here.

Know the Rules About Supplemental Wage Withholding Rates

Each pay period, employers withhold federal and state taxes based on the elections made by employees using Form W-4. But sometimes employees receive supplemental wages outside of normal payrolls, such as bonuses, awards, commissions, or other lump sum payments. Did you know that withholding for these irregular payments can be withheld at a different rate?

Federal tax withholding for these supplemental wages can be made at a flat 22% rate up to payments of $1 million for the year. Any supplemental wages over $1 million must be withheld at a mandatory rate of 37%. The flat 37% rate applies even if the employee has submitted a Form W-4 claiming exemption from federal tax withholding.

Each state has different rules about supplemental wage withholding. For example, California’s supplemental wage withholding rate is 10.23% for bonuses and stock options but 6.6% for all other types of supplemental payments. Kansas has a flat 5% supplemental wage withholding, and Missouri’s is 5.3%. Some states, such as Connecticut and Hawaii, have no separate rate for supplemental payments. Check your state’s Department of Revenue website for rules in your state (or ask your Mize payroll professional for assistance).

Answers at the end of this newsletter

1. There are 12 legal holidays observed by the IRS in 2024. Can you name them all? (Hint: the term “observed by the IRS” is important). This matters because due dates for tax matters are generally due the day after the normal due date if it falls on a Saturday, Sunday, or legal holiday.

2. There are 9 states with no individual income tax withholding. What are they?

State By State News

California

Sick Leave Changes Effective 1/1/24

California employers must provide employees with at least 40 hours or 5 days of paid sick leave per year beginning January 1, 2024. This is an increase from the 24 hours/3 days in the previous ruling. Employers have the option to either front-load sick pay at the beginning of the year or accrue sick pay throughout the year.

The sick leave allowance is either 40 hours or 5 days, whichever provides more time for the employee. This means that an employee who normally works 10 hour shifts would receive 50 hours of sick leave, and an employee who normally works 6 hour shifts would receive an additional 10 hours of sick leave after taking 5 days.

If employees accrue sick leave, they must receive at least 1 hour of sick pay for every 30 hours worked. Employees must receive at least 24 hours of accrued sick leave by the 120^th calendar day of employment and 40 hours by the 200^th calendar day of employment.

If an employer front-loads sick pay, the full amount must be made available to the employee from the beginning of each year of employment, calendar year, or 12-month period. New hires must receive 40 hours by the 120^th day of employment.

An updated employer poster can be found by clicking here.

SDI Rate Increases for 2024

Effective January 1, 2024, the California state disability insurance (SDI) employee contribution rate will be 1.1% with no taxable wage base limit. 

Illinois

Chicago Paid Sick Leave Implementation Delayed

The Chicago City Council voted in December to amend the effective date of the Chicago Paid Leave and Paid Sick and Safe Leave Ordinance from December 31, 2023 to July 1, 2024.

Answers to the Payroll Quiz

The 12 legal holidays observed by the IRS in 2024 are:

January 1 – New Year’s Day

January 15 – Martin Luther King’s Birthday

February 19 – Washington’s Birthday

April 16 – District of Columbia Emancipation Day (did you know this one if you don’t live in DC?)

May 27 – Memorial Day

June 19 - Juneteenth

July 4 – Independence Day

September 2 – Labor Day

October 14 – Indigenous Peoples Day (previously Columbus Day)

November 11 – Veterans Day

November 28 - Thanksgiving

December 25 – Christmas

Nine States with No Income Tax Withholding on Wages

1.    Alaska

2.    Florida

3.    Nevada

4.    New Hampshire

5.    South Dakota

6.    Tennessee

7.    Texas

8.    Washington

9.    Wyoming

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