Payroll-Related Changes May Affect You for 2013– November 29, 2012

Sun setting tax provisions as well as new Patient Protection and Affordable Care Act (PPACA) provisions will mean changes in payroll-related taxes for 2013. Below is a list of some of the more significant changes to be aware of:

Employee Social Security Tax Withholding Reverts Back to 6.2%
For years 2011 and 2012, the employee Social Security tax withholding rate was reduced by 2% to a rate of 4.2%. If this provision is not extended, beginning January 1, 2013, the Social Security tax withholding rate will revert back to 6.2%. The Social Security wage base limit is $110,100 for 2012 and it will increase to $113,700 for 2013.

Additional Medicare Payroll Tax For Certain Individuals
Beginning January 1, 2013, PPACA will require higher-income taxpayers to pay an additional Medicare tax on wages, other compensation and self-employment income over certain thresholds. Under the new law, high-income individuals will pay an additional Hospital Insurance (HI) tax of 0.9% on earned income in excess of:

  • $200,000 for single, head of household with qualifying child, and qualifying widow(er) with a dependent child,

  • $250,000 for married couples filing jointly, and

  • $125,000 for married couples filing separately.

Employers are required to withhold the additional 0.9% Medicare Tax on compensation in excess of $200,000 paid to employees in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the additional Medicare Tax. Any unnecessary Medicare withholding will most likely be claimed as a credit on an individual tax return for 2013. This additional withholding is not required to be matched by the employer.

Health Care Flexible Spending Account Contribution Limits
Beginning in 2013, the Patient Protection and Affordable Care Act will limit the maximum amount that an employee can elect to contribute to a health care flexible spending account (FSA) to $2,500 per year. Prior to this enactment, employers were permitted to enact any maximum annual election for their employees.

Income Tax Increases
An individual’s personal income tax liability may increase for 2013 due to tax changes, including:

  • Reinstatement of the 36% and 39.6% federal income tax brackets;

  • Increase of the capital gains rate from 15% to 20%;

  • Increase in the dividends tax rate from 15% to 39.6%;

  • Reinstatement of the phaseout of itemized deductions;

  • Reinstatement of the phaseout of personal exemptions;

  • Implementation of the new 3.8% Medicare tax on net investment income over $200,000 ($250,000 for married taxpayers who file jointly)

  • The net investment income that is subject to the 3.8% tax consists of interest, dividends, annuities, royalties, rents, and net gains from property sales. Income from an active trade or business isn't included in net investment income, nor is wage income. However, passive business income is subject to the Medicare contribution tax. Income from a business of trading financial instruments or commodities is also included in net investment income.

Please consult your tax advisor regarding the impact that these and other tax-related changes may have on your personal income tax liability in 2013.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.