Alert: For 2014, the maximum amount of earnings subject to the Social Security payroll tax will increase to $117,000 from $113,700, beginning Jan. 1. For information about 2014 Social Security and Medicare payroll tax adjustments, please see the SHRM Online article, "FICA Adjusts: Income Subject to Payroll Tax Increases in 2014."
On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012, signed into law the following day. The legislation did not extend a 2 percent temporary payroll tax cut in effect since 2011, and so increased from 4.2 percent to 6.2 percent the Social Security FICA employee tax on the first $113,700 of wages. The portion of the tax paid by employers remained at 6.2 percent of employee wages, for a total Social Security FICA tax of 12.4 percent. The Internal Revenue Service issued new 2013 tax withholding tables for employers.
The Medicare portion of the FICA tax remained at 2.9 percent, of which half (1.45 percent) is paid by employees and half by employers, with no limit on the amount of wages subject to the Medicare portion of the tax. This results in a total FICA tax of 15.3 percent (Social Security plus Medicare), half of which is paid by employees and half by employers. Those who are self-employed are responsible for the entire FICA tax rate of 15.3 percent (12.4 percent Social Security + 2.9 percent Medicare).
Employers should have started using the revised withholding tables no later than Feb. 15, 2013. For any Social Security tax under-withheld before that date, employers were to make the appropriate adjustment in workers’ pay as soon as possible but not later than March 31, 2013.
See SHRM Online articles "'Fiscal Cliff' Law Affects Payroll Tax Withholding and Employee Benefits" and "IRS Releases Tax Withholding Guidance for 2013."
Instead of a raise, some employees will see their take-home pay shrink in 2013 due to higher Social Security and Medicare taxes.
The maximum amount of earnings subject to the Social Security tax (taxable maximum) increasedto $113,700 from $110,100 as of January 2013, the U.S. Social Security Administration (SSA) announced on Oct. 16, 2012.
Social Security and Medicare payroll withholding are collected together as the Federal Insurance Contributions Act (FICA) tax.
By January 1, U.S. employers should have adjusted their payroll systems to account for the higher taxable maximum under the Social Security portion of FICA, and notified affected employees that more of their paychecks will be subject to FICA.
Of the estimated 163 million workers who will pay Social Security FICA taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum, according to the SSA, which has published FAQs about these changes.
The inflation-based increase in wages subject to Social Security withholding is separate from the scheduled expiration of the temporary 2-percentage-point cut of the federal Social Security tax that was part of an economic and jobs package enacted at the end of 2010 and subsequently extended through the end of 2012.
In 2013, with the higher income ceiling and the return to the 6.2 percent withholding rate, the maximum yearly Social Security tax withholding rises from $4,624.20 (4.2 percent on income up to $110,100) to $7,049.40 (6.2 percent on income up to $113,700).
Maximum yearly Social Security tax withholding rises
from $4,624.20 (4.2 percent on income up to $110,100) to
$7,049.40 (6.2 percent on income up to $113,700).
As a result, even employees who receive salary increases for 2013 may see the size of their paychecks shrink next year, especially if their pay raise is less than 2 percent. Notifying employees that FICA taxes are increasing for 2013 and highlighting the value of the employer-provided benefits package can help stave off falling morale (see, for example, the SHRM Online article "Benefits Statements Can Spotlight Hidden Value.")
Medicare Tax Rises for Higher Earners
Unlike Social Security, the amount of compensation subject to the 1.45 percent Medicare FICA tax is uncapped. However, in 2013, the Medicare tax rate rises to 2.35 percent for single taxpayers with annual income of more than $200,000 and for married joint filers whose combined annual income exceeds $250,000, under a provision of the Patient Protection and Affordable Care Act.
Medicare Premium Hike May Offset Benefit Increase
In addition, the SSA announced that monthly Social Security and Supplemental Security Income (SSI) benefits paid to nearly 62 million Americans will increase by 1.7 percent in 2013.
The 1.7 percent cost-of-living adjustment (COLA) begins with benefits that more than 56 million Social Security beneficiaries, and more than 8 million SSI beneficiaries, receive in January 2013. The Social Security Act provides how the annual COLA is calculated.
For many beneficiaries, however, their Social Security increase will be partially or completely offset by increases in Medicare Part B premiums, which typically are deducted from Social Security benefits. Medicare Part B premium costs for 2013 were to be subsequently announced, but estimates, including the 2012 Medicare board of trustees' annual report, indicate an increase is on the horizon.
"This reflects the growing trend of health-related expenses eating into retirement income," said Cathy Weatherford, president and CEO of the not-for-profit Insured Retirement Institute, in a media statement. She advised those currently employed to develop a retirement plan that includes a strategy to cover basic living expenses as well as medical expenditures.
Additional information about Medicare changes for 2013 can be found at www.Medicare.gov.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Early Release Copies of the 2013 Percentage Method Tables for Income Tax Withholding, IRS, January 2013
IRS Provides Updated Withholding Guidance for 2013, IRS, January 2013
IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts, Accounting Today, January 2013
Related SHRM Articles:
Fiscal Cliff' Law Affects Payroll Tax Withholding and Employee Benefits, SHRM Online Benefits, January 2013
IRS Releases Tax Withholding Guidance for 2013, HR News, January 2013
Payroll Tax Cut Puts Employers in Quandary, HR News, October 2012
IRS May Owe Employers Millions in FICA Refunds, SHRM Online Legal Issues, October 2012
Compensation Function Heightens Focus on Communication, SHRM Online Compensation, September 2012
For 2013, New Medicare Taxes on High Earners, SHRM Online Compensation, July 2012
IRS Issues Guidance on $2,500 FSA Limit for 2013, SHRM Online Benefits, June 2012
For 2013, Higher Limits for HSA Contributions, SHRM Online Benefits, April 2012