The APA (American Payroll Association) released the following update January 3, 2013:
Payroll in 2013 – Higher Social Security Tax Rate; New Withholding Tables
On January 2, 2013, President Barack Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA 2012; H.R. 8). The new law permanently fixes income tax rates at the levels established by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, Pub. L. 107-16) that were extended through 2012, except for a new higher rate for certain high income taxpayers, thus temporarily at least avoiding the so-called “fiscal cliff.” Under ATRA 2012, the 2012 tax rates of 10%, 15%, 25%, 28%, 33%, and 35% will remain in effect, with no expiration date. ATRA 2012 establishes a new 39.6% bracket for certain high income taxpayers, generally those with taxable income over $400,000.
2013 Withholding Tables Issued
With the tax rates remaining relatively stable, most employees will not see an increase in their federal income tax withholding for 2013, and many will see a slight decrease because of adjustments for inflation. On January 3, the IRS issued Notice 1036, Early Release Copies of the 2013 Percentage Method Tables for Income Tax Withholding. Wage-bracket withholding tables for wages paid in 2013 have not yet been released. In Notice 1036, the IRS tells employers to implement the tables as soon as possible, but not later than February 15, and to use the 2012 withholding tables until they can implement the 2013 tables. This version replaces an earlier version of Notice 1036 issued on December 31, 2012, whose tables were based on higher tax rates that would have taken effect had ATRA 2012 not been enacted.
Employee Social Security Tax Rate Goes Back to 6.2%
But employees’ net pay will generally go down because ATRA 2012 does not extend the reduced 4.2% employee social security tax rate to wages paid after December 31, 2012. The employee tax rate for all social security wages paid in 2013 up to the wage base of $113,700 is 6.2%, the same as the employer tax rate. In Notice 1036, the IRS tells employers to implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013, and to make an adjustment to correct any underwithholding as soon as possible, but not later than March 31, 2013.
Supplemental Withholding: Optional Rate Stays at 25%; Mandatory Rate to 39.6%
Because ATRA 2012 maintains the 25% tax bracket, the optional flat rate for federal income tax withholding from supplemental wages up to $1 million remains at 25%. However, the establishment of a new maximum individual tax rate of 39.6% means that the mandatory flat rate for federal income tax withholding from supplemental wages that exceed $1 million increases from 35% to 39.6% for qualifying payments made on or after January 1, 2013.
Backup Withholding Rate
Because ATRA 2012 maintains the fourth lowest tax rate at 28%, the backup withholding rate for payments made to independent contractors that fail to provide a valid Taxpayer Identification Number (TIN) remains at 28%.
Educational and Adoption Assistance Exclusions Now Permanent
Because of ATRA 2012, the income exclusion under IRC §127 for up to $5,250 per year of nonjob-related undergraduate and graduate educational assistance provided by an employer to an employee has become permanent, with no expiration date. Also, the income exclusion for employer-provided adoption assistance under IRC §137 is now permanent. Both of these important employee fringe benefits would have expired had EGTRRA been allowed to expire.
Parity for Mass Transit Benefits
The American Recovery and Reinvestment Act of 2009 provided parity for qualified mass transit, van pooling, and parking benefits under IRC §132(f) through December 31, 2010, and this treatment was later extended through December 31, 2011. With the expiration of the parity, the 2012 van pooling and mass transit benefits were $125 per month while parking benefits were $240 per month. ATRA 2012 restores the parity for mass transit, van pooling, and parking benefits, retroactive to January 1, 2012, through December 31, 2013.
Transfer of Retirement Plan Amounts to Roth Accounts
ATRA 2012 adds IRC §402A(c)(4)(E), under which an employee can transfer amounts from their 401(k), 403(b), or 457(b) plan account to a designated Roth account after December 31, 2012. For this to happen, the retirement plan must have a qualified Roth contribution program. The transferred amounts are taxable at the time of the transfer and are treated as a qualified rollover contribution to the Roth account.
More Guidance Needed
While the IRS has reacted quickly to the enactment of ATRA 2012 with the issuance of Notice 1036, there are several important items remaining that payroll professionals need to properly process payrolls in 2013, including:
- 2013 Form W-4, Employee’s Withholding Allowance Certificate
- 2013 IRS Publication 15, Circular E, Employer’s Tax Guide
- 2013 IRS Publication 15-A, Employer’s Supplemental Tax Guide
- 2013 IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits Inflation-adjusted amount for qualified transportation fringe benefits
- Inflation-adjusted amounts for qualified adoption assistance and income phase-out
- 2013 IRS Publication 1494, Table for Figuring Amount Exempt from Levy on Wages, Salary, and Other Income (Forms 668-W(ACS), 668-W(c)(DO) and 668-W(ICS))
SBS Payroll is already configured to the 2013 Withholding Tables.