With all of the confusion and last minute changes, the IRS is just releasing the 2013 employer tax withholding tables for 2013 in Notice 1036.
The new tables reflect the “fiscal cliff” changes and employers should begin using the revised tables as soon as possible. If you are working with an outside payroll service, I advise you to discuss with them how the tax changes will be implemented to ensure that cumulative withholdings for social security will be properly reflected in the employee’s 2013 W-2. If you are handling payroll in-house, check with the support group that provides tax rate updates and make sure the employee’s withholding will be accurate on a year-to-date basis. Employers have until February 15, 2013 to begin using the new social security withholding rates. Employers must correct cumulative withholdings no later than March 31, 2013. All employers are encouraged to make adjustments as soon as possible.
The new social security withholding rates revert back to the rates before the temporary two-percentage point payroll tax cut which was enacted in 2010 for 2011 and 2012. That tax cut lowered the employee withholding rate from 6.2% to 4.2%. Effective 1/1/2013, the temporary tax benefit has expired and the rate reverted back to 6.2%.
Remember, the 2013 social security wage base is $113,700. So the 6.2% employee withholding tax will max out at $7,049.40 in 2013.
Medicare withholding taxes remain at 1.45% and apply to every dollar the employee is paid. There is a new Additional Medicare Tax layer that came with the health care legislation. Employers must withhold from any employee making more than $200,000 an additional 0.9% Medicare tax. The new layer only applies to earnings of $200,000 or more and is not matched by the employer. These are the withholding rules for the new Medicare tax, not the tax rates. The 0.9% tax applies to every dollar of wages or self-employment income over $200,000 for individuals and $250,000 for couples filing jointly. So a couple earning $150,000 each will owe the additional tax on their last $50,000 of income, but the employers will not be required to withhold that tax. It will be adjusted on their 2013 federal income tax return.
The new withholding tables also reflect the higher income tax rates for those earning more than $400,000 as single taxpayers and $450,000 as married taxpayers. The new top rate is 39.6%. Be careful with your withholding on bonus payments in 2013 as the new top rate is higher than the required withholding rate of 25% on bonuses up to $1,000,000 and 35% on amounts over $1,000,000. Your higher paid employees may wish to have additional tax withheld from their bonus check to avoid an under-withheld situation.
Employees are not required to submit a new W-4 withholding tax form, but the IRS has long urged all workers to review their withholdings every year and to adjust their W-4 to reflect significant life events.