IRS Issues Withholding Tables Reflecting Fiscal Cliff Tax Deal
The IRS has issued updated withholding tables that take into account the extension of the Bush-era rates as well as the new tax rates and phase-outs imposed on higher-earning individuals. See our article, "Tax Deal Preserves Tax Breaks for Most Americans, Creates Planning Challenges for Upper-Income Taxpayers," for information on the provisions contained in the American Taxpayer Relief Act of 2012 (HR 8.)
Payroll Tax Reduction Expires
For 2013, the employee tax rate for Social Security increases to 6.2 percent because Congress did not extend the two-percent reduction that had been in place for 2011 and 2012. Thus, employers will need to withhold 6.2 percent on the first $113,700 of wages paid to an employee in 2013. Employers will also need to pay 6.2 percent up to the wage base limit of $113,700.
Both employees and employers will be liable for the Medicare (Hospital Insurance) tax of 1.45 percent on the total amount of compensation paid to the employee--there is no wage base limit on this tax. In addition, employers will be required to withhold an additional 0.9 percent when an employee's compensation exceeds $200,000.
Employers are required to withhold the 0.9 percent surtax as soon as an employee's compensation reaches $200,000 and have no obligation to withhold until the employee reaches that amount. See our article, Medicare Surtax on Earnings Takes Effect on New Year's Day for additional information on withholding requirements.
Withholding Compliance Required by February 15
The IRS urges employers to begin immediately to withhold the increased employee share of the Social Security tax. IRS Notice 1036, Early Release Copies of the 2013 Percentage Method Tables for Income Tax Withholding, advises employers to continue to use the 2012 tables until the 2013 tables are implemented.
The correct withholding based on 2013 rates must be implemented by February 15, 2013. After implementing the new rates, employers should make an adjustment in a subsequent pay period to correct any underwithholding as soon as possible, but not later than March 31, 2013.