What to Do about Payroll Withholding in January

If you do payroll in-house, expect to put in more time and money in 2013 to comply with your withholding obligations. Because Congress did not fix the fiscal cliff by the third week in December, it is too late for the IRS to change its withholding tables for January.

The American Payroll Association posted on its Facebook page on December 21: “we believe that employers should continue to use the 2012 withholding tables if they have to process their first payrolls of 2013 before any official guidance is released, as it is the only workable option.”

Down the road
Eventually, the tax situation will be resolved, allowing the IRS to revise withholding tables accordingly.

  • If Congress retains 2012 tax rules. If Congress extends the 2 percentage point reduction in the employee share of Social Security taxes (part of FICA) as well as the tax rates for all individuals, then current tables, with some adjustments reflecting cost-of-living increases, will apply. Employees will see little or no changes in their paychecks.
  • If Congress does not extend the Social Security tax break and/or retain current income tax rates. The IRS will issue new tables to reflect tax law changes. The tables will incorporate tax rates as of January 1. If, for example, the Social Security tax break is not extended for 2013, someone earning $50,000 would owe $1,000 more in this tax than he or she paid in 2012. This amounts to lower take-home pay of about $42 per paycheck (assuming paychecks are issued twice a month). If income tax rates are raised on high earners, their income tax withholding will reflect their added tax liability.

What is already new for 2013

  • Regardless of movement on the fiscal cliff, some payroll tax changes are certain to apply starting in January. Higher Social Security tax wage base. Earnings up to $113,700 will be subject to the Social Security portion of FICA in 2013 (up from $110,100 in 2012).
  • Additional Medicare tax on high earners. Employers must begin withholding for the 0.9% additional Medicare tax once an employee’s taxable pay exceeds $200,000. This withholding obligation applies even if the employee will not owe the tax (e.g., because he/she is married with a threshold for the tax of the couple’s earnings over $250,000).

You can find more information about withholding and the additional Medicare tax, which likely won’t apply to any employees until later in the year, here.

What to tell employees
Employees listening to the news about the fiscal cliff may be confused about what the news means for them. Here are some items to share with your staff:

  • You are complying with tax law requirements on payroll withholding.
  • If Congress fails to extend the Social Security tax cut for them, their paychecks will be smaller; you cannot do anything about this.
  • Inform high earners about the new additional Medicare tax. High earners cannot request that you increase FICA withholding, but they can ask for additional income taxes to be withheld; these taxes can then be applied toward their FICA obligation when they file their Form 1040 for 2013.
  • Regardless of any payroll changes, employees who have experienced or expect to experience life changes in 2013 (e.g., the birth of a child, the purchase of a home, or a spouse returning to or retiring from the workforce) may want to complete Form W-4, Employee’s Withholding Allowance Certificate, to make changes in their income tax withholding. More withholding allowances equals less withholding and more take-home pay; fewer allowances means less take-home pay.

Final thought
Confused? Who wouldn’t be at this point? It’s tough enough for employers to figure withholding on wages. With Congressional inaction making it impossible for the IRS to craft new tables for the start of 2013, it means that the rest of the year will be slightly off. When withholding tables are eventually released, they will have to take into account what was not done at the start of the year. Instead of doing payroll in-house, this year may be the time to use an outside payroll service. Whatever you decide, good luck.

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