As a result of Obama Care and the new tax provisions signed into law earlier this month, employers need to be aware of significant changes in withholding taxes for their employees in 2013. While the IRS is giving employers a brief window to implement these changes, it is prudent to do so now to avoid any potential IRS issues in the future.
Social Security Tax
The American Taxpayer Relief Act of 2012 put an end to the Payroll Tax Holiday. Previously, the Social Security tax rate was 4.2%. As of January 1, 2013, employers are now required to withhold 6.2% for Social Security. The social security wage base limit increased to $113,700, an increase of $3,600 from the 2012 wage base of $110,100. This means that in 2013, Social Security tax will be collected only on the first $113,700 earned. While the IRS would prefer that the new tax increase be implemented immediately, employers have until February 15, 2013 to make the change. After the change has been made, the IRS is giving employers until March 31, 2013 to make an adjustment in a subsequent pay period to correct any under-withholding of Social Security tax.
Income Tax Withholding
The IRS recently released the new Percentage Method Tables for Income Tax Withholding for 2013. The wage amounts in the table below are net wages after the deduction for total withholding allowances. Withheld tax amounts should be rounded to the nearest dollar by dropping amounts under 50 cents and increasing amounts from 50 to 99 cents to the next higher dollar. As with the Social Security Tax, the IRS is giving employers until February 15, 2013 to implement the new withholding allowance.
|Payroll Period||One Withholding Allowance|
|Daily or Miscellaneous (each day of the pay period)||$15.00|
As part of the Affordable Care Act, a new 0.9% Medicare Hospital Insurance (HI) tax will be imposed on self-employed individuals and employees on earnings and wages received during the year. The tax is triggered once the modified adjusted gross income of an employee exceeds $200,000. Employers are required to begin withholding the HI tax in the pay period in which paid wages exceed the $200,000 threshold and continue to withhold it each pay period until the end of the calendar year. The HI tax is only imposed on the employee; there is no employer share of the tax. Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.