Well, that didn't take long. The IRS has already released guidance (Notice 1036) alerting employers to the changes they will need to make in payroll withholding for 2013.
These increases create an additional burden for employers by creating more non-compliance. Failure to make deposits of employment taxes, is one of the most serious actions a business can make, at least according to the IRS. The IRS treats payroll tax problems most severely. First, the IRS may look to shut down a business. Second, the IRS may look to assess the trust fund penalty, and those responsible are personally assessed for any unpaid trust fund taxes.
The first increase is the additional 2% employee portion of the payroll tax. Yes, every working American will be paying more taxes in 2013. Any employees making over $200,000 will have an additional 0.9% withheld from their paychecks for the Medicaid contribution tax (aka the Obamacare tax). Every single dollar of ordinary income was already subject to a total of 2.9% with no cap (1.45% on both the employer and employee side), and that hasn't changed.
Employers are urged by the IRS to make the adjustment as soon as possible. For most taxpayers – the result will be a 3%-5% reduction in take-home pay. If employers don't make the change until they are required to do so (not later than February 15th), they will have to make up for over a month of under withholding in "a subsequent pay period." They must make up the difference no later than March 31, 2013. So yes, almost everyone's taxes went up in 2013 – thanks, Washington! The worst part, though, is the upfront financial pain that will be inflicted on many as a result of the government's delay in passing the fiscal cliff legislation.
What are the "Percentage Method Tables for Income Tax Withholding" for 2013? The following chart is for an individual (or head of household) employee and is based on a weekly pay schedule:
| If the Amount (after subtracting withholding allowances)of wages is.. | The Amount to Withhold is… | ||
| Over | but not over | ||
| $42 | $214 | $0.00 plus | 10% of the excess over $42.00 |
| $214 | $739 | $17.20 plus | 15% of the excess over $214 |
| $739 | $1,732 | $95.95 plus | 25% of the excess over $739 |
| $1,732 | $3,566 | $344.20 plus | 28% of the excess over $1,732 |
| $3,566 | $7,703 | $857.72 plus | 33% of the excess over $3,566 |
| $7,703 | $7,735 | $2,222.93 plus | 35% of the excess over $7,703 |
| $7,735 | …… | $2,234.13 plus | 39.6% of the excess over $7,735 |
Both employees and employers should be aware of the potential employment tax problems that could arise as the result of the adjustments to withholding. If you are an employee, you'll see your net paycheck drop this year if you haven't already. If you are an employer, you should check with whoever does your payroll to find out when they plan on "making up" for any under withholding and keep your employees in the loop.
If you need assistance with a payroll tax issue, contact us. We can help.
