Tax Changes Affecting 2013 Payrolls – What You Need to Know

Tax Changes Affecting 2013 Payrolls – What You Need to Know


By ADP Staff  –  January 2013

The House and Senate have passed H.R. 8, the American Taxpayer Relief Act of 2012 (ATRA), which includes several changes to tax laws affecting payroll and employment tax administration in 2013. President Obama is expected to sign the bill into law within 24 hours.

COMMON QUESTIONS

ANSWERS

How will my payroll taxes be calculated today?

ADP will continue to use 2012 Federal Tax Tables.  The 2013 tables will be implemented shortly after President Obama signs the bill.

I heard the IRS already released the new 2013 tax table – why isn’t that being used?

Those tables do not reflect the rates recently included in the legislation approved by Congress.

Will the employee Social Security rate be changed?

Yes, the employee Social Security rate has increased to 6.2%.

Will the employee Medicare rate be affected?

Yes, Medicare Tax will increase by 0.9% for all employees earning over $200,000.

How can I get more information on the tax changes for 2013?

Please visit and subscribe to ADP’s “Eye on Washington” web page, located at www.adp.com/regulatorynews for the latest updates. 

Please see below for changes included in the 2013 legislation.

Income Tax Withholding Rates:  The American Taxpayer Relief Acteffectively maintains the reduced income tax rates adopted in 2001 and 2003 for individuals earning up to $400,000 and families earning less than $450,000.  Income above those levels will be taxed at 39.6%, up from 35%.  The expanded 15% bracket for joint filers, commonly referred to as the marriage penalty relief, has also been extended.

These tax rates have been extended permanently for wages paid after December 31, 2012. 

Employee Social Security Tax Rate Returns to 6.2%:  The reduced 4.2% rate for employee Social Security taxes that was in effect for 2011 and 2012 has expired. The employee Social Security tax rate will return to 6.2% for 2013 wages up to the taxable wage limit of $113,700. Consequently, employees’ net pay under the taxable wage limit will decrease accordingly.  The maximum Social Security tax that an employee would pay will be $7,049.40 for 2013.

The Employer Social Security tax rate is unaffected, and remains 6.2% of Social Security taxable wages paid.  The maximum that an employer would pay for an employee will be $7,049.40 for 2013, as shown below:

 

Employee Social Security Tax Rate

Employer Social Security Tax Rate

Social Security Taxable Wage Base Rate

Maximum Employee Social Security Tax Paid

2012

4.2%

6.2%

$110,100

$4,624.20

2013

6.2%

6.2%

$113,700

$7,049.40

Difference

2%

0

$3,600

$2,425.20

These changes have been implemented by ADP and automatically applied to all 2013 payrolls. 

Transition to 2013 Withholding Calculations:  Some 2013 payrolls were already produced prior to the enactment of the American Taxpayer Relief Act, and some payrolls produced shortly after enactment may be calculated using 2012 income tax withholding rates. This is permitted under recent IRS guidance, which instructs employers to implement 2013 withholding rates no later than February 15, 2013, and to “use 2012 withholding tables until you implement the 2013 withholding tables.”

However, because the American Taxpayer Relief Act generally restored the income tax rates in effect in 2012, any 2013 payrolls processed prior to enactment are expected to be correct, with the exception of individuals earning annualized amounts over $400,000, as explained above. There may be minor withholding differences due to inflation adjustments in the 2013 withholding tables issued by the IRS.

Revised withholding calculations will be implemented by ADP upon issuance of further guidance from the IRS, and effective for payrolls processed after implementation.

Supplemental Wage Withholding Rate:  Because the withholding rate for “supplemental wages,” such as bonuses under $1 million, was not dependent on issuance of IRS withholding tables, ADP implemented the withholding rate of 28% that was statutorily in effect for supplemental wages paid in 2013. For supplemental wage payments over $1 million in a year after 12/31/2012, the withholding rate was increased from 35% to 39.6%.  These changes were implemented by ADP and automatically applied to 2013 payrolls.

Revised withholding calculations will be implemented by ADP upon issuance of further guidance from the IRS, and effective for payrolls processed after implementation.

Additional Medicare Tax for Earnings over $200,000:  Although not affected by the ATRA, the Patient Protection and Affordable Care Act established a new “Additional Medicare Tax” of 0.9% which also goes into effect in 2013.  The new Additional Medicare Tax applies to single individuals earning over $200,000 and married couples filing jointly who earn over $250,000.  However, employers must withhold the Additional Medicare Tax from all workers, regardless of marital status, on wages exceeding $200,000. Thus, the employee Medicare tax rate, normally 1.45%, will rise to 2.35% on earnings over $200,000, regardless of filing status.  The employer Medicare tax rate remains 1.45%.  There is no taxable wage limit for Medicare taxes.

For additional information on the Additional Medicare Tax, please see our previous Eye on Washington here.

Parity for Exclusion from Income for Employer-Provided Mass Transit and Parking Benefits:  Prior to 2012, employers could withhold up to $230 a month on a pre-tax basis for mass transit benefits for workers. The amount decreased to $125 on January 1, 2012, while a similar provision for parking expenses increased to $240.  Parity for pre-tax treatment of employer-provided mass transit and parking benefits was retroactively extended by the ATRA from January 1, 2012 through December 31, 2013.

Other Provisions of Interest to Employers:

  • The ATRA will retroactively extend the employer wage credit for differential wage payments to employees who are active military reservists, from January 1, 2012 through December 31, 2013.

  • The Work Opportunity Tax Credit will be retroactively extended from January 1, 2012 through December 31, 2013.

  • The Act will extend through 2013 the Returning Heroes and Wounded Warriors Work Opportunity Tax Credits; a Work Opportunity Tax Credit for hiring qualified veterans.

  • The exclusion for employer provided adoption assistance is made permanent by the Act.

  • The expanded exclusion for employer-provided educational assistance will be made permanent, permitting up to $5,250 per year to be excluded from income and employment taxes, including undergraduate and graduate education.

  • The ATRA includes other provisions as well (please revisit the site for ongoing updates and additional information).

State Tax Implications:  Several states have income tax withholding calculations that are directly or indirectly tied to federal tax calculations. These calculations will automatically be updated based upon the federal and/or state withholding guidance upon release by the applicable authorities. As with federal withholding tax calculations, any changes will apply to payrolls processed after implementation.

Employers May Assist in Explaining Transition to 2013 Tax Rates:  Under the circumstances, it would be helpful if employers were to provide a brief explanation to employees as they review their initial paychecks of 2013. ADP clients are invited to use the information contained in this alert for such purposes; however, please remind all employees that they should seek the advice of a qualified attorney or tax professional to assist them in determining the effect to their particular circumstances.

ADP Compliance Resources:  ADP maintains a staff of dedicated professionals who carefully monitor all federal and state legislative and regulatory measures affecting human resource, payroll, tax and benefits administration, and ensure that ADP systems are updated as relevant laws evolve.  For the latest on late-breaking federal tax law changes, visit the ADP “Eye on Washington” web page located at www.adp.com/regulatorynews.

ADP is committed to assisting businesses with increased compliance requirements resulting from rapidly evolving legislation. Our goal is to minimize your administrative burden across the entire spectrum of payroll, tax, HR and benefits, so that you can focus on running your business. Neither the content nor the manner in which this notice is presented reflects the thoughts or opinions of ADP or its employees. This notice is provided as a courtesy to our clients, to assist in understanding the impact of certain regulatory requirements, and should not be construed as tax or legal advice. Such information is by nature subject to revision and may not be the most current information available. ADP encourages interested readers to consult with appropriate legal and/or tax advisors. Please be advised that calls to and from ADP may be monitored or recorded.