Law Changes Will Result in Smaller Paychecks in 2013

A number of law changes go into effect in 2013 that will result in employees seeing smaller paychecks, including the expiration of the payroll tax cut, the increase in the Social Security taxable wage base, and the new 0.9% Medicare tax imposed on high wage earners. This article explains the changes and provides illustrations to show their effect on workers' paychecks.

Background. The following law changes go into effect in 2013:

• The payroll tax cut, which temporarily lowered the Social Security withholding tax rate on wages earned by employees in 2011 and 2012 from 6.2% to 4.2%, has expired. Accordingly, employees will see a 2-percentage-point bump in the amount of Social Security tax withheld from their paychecks from 2012 to 2013.
• The Social Security taxable wage base has increased by $3,600, from $110,100 to $113,700.
• An additional 0.9% Medicare surtax is withheld from wages paid to an employee in excess of $200,000 in a calendar year. (See Weekly Alert ¶  10  12/06/2012 for details on proposed reliance regs explaining this new tax.)

Effect of these changes on paychecks. The following illustrations show the effect of these law changes on employees' paychecks:

• Employees earning $50,000 in 2013 FICA wages will have $1,000 more in FICA taxes withheld ($50,000 × [6.2% - 4.2%]) than they would have in 2012, due to the 2-percentage-point increase in the Social Security tax rate.
• Employees earning $75,000 in 2013 FICA wages will have $1,500 more in FICA taxes withheld ($75,000 × [6.2% - 4.2%]) than they would have in 2012, due to the 2-percentage-point increase in the Social Security tax rate.
• Employees earning $100,000 in 2013 FICA wages will have $2,000 more in FICA taxes withheld ($100,000 × [6.2% - 4.2%]) than they would have in 2012, due to the 2-percentage-point increase in the Social Security tax rate.
• Employees earning $113,700 in 2013 FICA wages will have $2,425.20 more in FICA taxes withheld than they would have in 2012. This includes $2,202 in additional Social Security taxes due to the increase in the Social Security tax rate ($110,100 × [6.2% - 4.2%]), and $223.20 in additional Social Security taxes due to the increase in the Social Security taxable wage base ([$113,700 - $110,100] × 6.2%).
• Employees earning $300,000 in 2013 FICA wages will have $3,325.20 more in FICA taxes withheld than they would have in 2012. This includes $2,202 in additional Social Security taxes due to the increase in the Social Security tax rate ($110,100 × [6.2% - 4.2%]), $223.20 in additional Social Security taxes due to the increase in the Social Security taxable wage base ([$113,700 - $110,100] × 6.2%), and $900 in additional Medicare tax ([$300,000 - $200,000] × 0.9%).
• Employees earning $500,000 in 2013 FICA wages will have $5,125.20 more in FICA taxes withheld than they would have in 2012. This includes $2,202 in additional Social Security taxes due to the increase in the Social Security tax rate ($110,100 × [6.2% - 4.2%]), $223.20 in additional Social Security taxes due to the increase in the Social Security taxable wage base ([$113,700 - $110,100] × 6.2%), and $2,700 in additional Medicare tax ([$500,000 - $200,000] × 0.9%).
• Employees earning $1,000,000 in 2013 FICA wages will have $9,625.20 more in FICA taxes withheld than they would have in 2012. This includes $2,202 in additional Social Security taxes due to the increase in the Social Security tax rate ($110,100 × [6.2% - 4.2%]), $223.20 in additional Social Security taxes due to the increase in the Social Security taxable wage base ([$113,700 - $110,100] × 6.2%), and $7,200 in additional Medicare Tax ([$1,000,000 - $200,000] × 0.9%).

RIA observation: There is also a new 39.6% income tax withholding rate on high wage earners (previously, the highest withholding tax rate was 35%). This withholding rate is used for single taxpayers with annual wages greater than $402,200 and for married taxpayers with annual wages greater than $458,300.