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Policy & Regulation

Hawaii's Shifting Tax Brackets Mean Lower Employee Take-Home Pay, Impacting Payroll Planning

·5 min read·👀 Watch

Executive Summary

Hawaii's income tax structure has shifted again in 2024, widening tax brackets to counteract previous increases in the standard deduction. This change effectively lowers take-home pay for many employees, necessitating a review of payroll and compensation strategies for businesses. Businesses should monitor employee net income changes to anticipate potential wage pressure or adjustments to benefits packages.

  • Small Business Operators & Entrepreneurs: Assess payroll adjustments and potential wage pressures.
  • Tourism Operators & Healthcare Providers: Understand implications for employee compensation impacting operational costs.
  • Real Estate Owners & Agriculture: Less direct impact, but consider the aggregate consumer spending effect.
  • Action: Monitor employee tax statements and adjust payroll withholding or compensation planning as needed.
👀

Watch & Prepare

Medium Priority⏰ Ongoing (for current and future tax planning)

Businesses need to understand how these tax code adjustments impact their employees' net income to inform payroll and compensation planning for the current and future tax years.

Monitor employee reporting of net income changes and tax statements. Assess current wage and benefits structures against the backdrop of altered take-home pay. Anticipate potential adjustments in payroll withholding or compensation strategies for the current tax year and beyond, as these biennial adjustments continue through 2031.

Who's Affected
Small Business OperatorsReal Estate OwnersTourism OperatorsEntrepreneurs & StartupsAgriculture & Food ProducersHealthcare Providers
Ripple Effects
  • →Reduced employee take-home pay → decreased consumer spending on local goods/services → potential revenue impacts for small businesses.
  • →Businesses raising wages to offset tax impact → increased operating costs → potential price hikes or margin compression.
  • →Lower net income → potential for increased demand for public assistance or pressure on businesses to supplement benefits.
Detailed close-up image of a U.S. 1040 Individual Income Tax Return form, ideal for finance-related content.
Photo by Kindel Media

Hawaii's Shifting Tax Brackets Mean Lower Employee Take-Home Pay, Impacting Payroll Planning

Hawaii's income tax structure has undergone further modification in 2024, following the pattern established by Act 46 (HB 2404). In even-numbered years, the state broadens existing income tax rate brackets, a move that, in conjunction with the standard deduction adjustments made in odd-numbered years, will result in a net change to employee take-home pay. This shift requires businesses to re-evaluate their payroll processing and compensation strategies to account for altered employee net incomes.

The Change

Act 46, enacted in 2024, introduced a biennial tax adjustment system. In odd-numbered years, the standard deduction increased. Conversely, in even-numbered years, the income tax rate brackets are substantially broadened. For 2024, this means that taxpayers may find themselves in a higher tax bracket more slowly than in previous years. However, the interplay between the increased standard deduction and the widened brackets can lead to a reduction in an employee's take-home pay, depending on their income level and specific deductions.

The legislation aims to provide tax relief, but the biennial nature of the adjustments means that the impact on employee net income is not static. For businesses, understanding these fluctuations is crucial for managing labor costs and employee satisfaction.

Who's Affected

  • Small Business Operators: With altered employee net incomes, businesses may face pressure to adjust wages or benefits to maintain current living standards for their workforce. This could lead to increased payroll costs if not adequately planned for. Entrepreneurs and startups will need to factor these potential compensation adjustments into their scaling budgets.
  • Tourism Operators: The hospitality sector, often reliant on a significant workforce, will need to monitor how these tax changes affect their employees' disposable income. Lower take-home pay could influence wage demands or the attractiveness of available jobs, potentially impacting staffing levels and operational costs.
  • Healthcare Providers: Similar to tourism operators, healthcare businesses must consider the impact on their staff. Changes in net income could affect recruitment and retention efforts, especially in competitive labor markets. Telehealth providers should also consider aggregate consumer spending power influenced by these tax shifts.
  • Real Estate Owners: While direct impact is minimal, landlords and property managers may observe shifts in tenant spending power. This could indirectly influence rental payment capacity or demand for certain types of rental properties.
  • Agriculture & Food Producers: These sectors, often sensitive to labor availability and costs, should track how changes in employee net income might affect their workforce's compensation expectations and overall labor pool dynamics.

Second-Order Effects

These tax bracket adjustments can initiate a chain reaction within Hawaii's unique economic landscape. A generalized reduction in employee take-home pay could lead to decreased consumer spending on non-essential goods and services. This, in turn, impacts demand for local businesses, potentially affecting revenue and the profitability of small businesses, restaurants, and retail operations. Furthermore, if businesses feel compelled to increase wages to offset the tax impact, this could drive up operating costs, potentially leading to price increases for consumers or reduced margins. In a high-cost-of-living environment like Hawaii, even minor reductions in take-home pay can have noticeable effects on household budgets and local economic activity.

What to Do

This situation requires observation and potential adjustment in payroll and compensation planning. The biennial nature of Act 46 means tax impacts will continue to evolve.

Action: Monitor employee net income changes reported on pay stubs and tax forms. Businesses should assess their current wage and benefits structures against the backdrop of altered take-home pay to anticipate any necessary adjustments in payroll withholding or compensation strategies for the current tax year and beyond. Given the ongoing nature of these tax bracket adjustments, continue to monitor legislative updates and economic indicators related to consumer spending and labor costs.

For the current tax year (2024), if your employees are seeing a decrease in net pay due to the bracket widening, consider having a conversation about compensation or benefits that might mitigate this impact. For future planning, anticipate that these biennial adjustments will continue through 2031, requiring ongoing vigilance.

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