On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
For two years, employees have enjoyed a 2% reduction in the FICA payroll tax. That will all come to an abrupt end beginning with their first payroll check in 2013 when the FICA rate returns to 6.2% (up from 4.2% in 2011 and 2012). Self-employed individuals will have a corresponding increase in their SE tax.
The maximum wage subject to the FICA tax in 2013 is $113,700 (up from $110,100 in 2012). Thus, if you make $113,700 or more during the year, the result will be a $2,274 increase in payroll tax for the entire year, and each paycheck will be reduced by 2% of your pay until the maximum amount has been withheld. If you make less than the maximum, simply multiply your pay for the year by 2% to determine your tax increase.
Employees who made more than $110,100 in 2012 enjoyed a period of time with no FICA withheld, but FICA withholding will return at the full 6.2% rate with the first paycheck in 2013.
To make matters worse, as part of the Obamacare legislation, higher income taxpayers are faced with an additional 0.9% health insurance (HI) tax. Starting in 2013, this surtax is imposed upon wage earners and self-employed taxpayers whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others.
Although each employer will withhold the additional tax, the employer is not required to account for other employment or both spouses working. Thus, in these situations when the total earned income exceeds the threshold amounts, the unpaid tax will have to be included on the 2013 tax return.
Example: John is a single individual who had two jobs in 2013. He earns $150,000 from one employer and $100,000 from the other. For the purposes of determining his liability for the extra 0.9% HI tax, his wages from both are added together, and to the extent that they exceed $200,000, he is subject to the additional 0.9% tax. Because he earned less than $200,000 from each employer, neither of them withheld any of the additional 0.9% tax. Because his total wages for the year were $250,000, John is liable for an additional $450 (0.009 x $50,000) in taxes when he files his 2013 tax return.
Example: A married couple, one earning $300,000 and the other $100,000, is subject to an additional tax of 0.9% of their combined incomes in excess of $250,000. In this case, that’s an additional 0.9% on $150,000 ($400,000 less $250,000). However, the spouse earning the $300,000 will already have had the additional tax withheld, so the amount of additional tax on their 2013 return will be $900 (0.009 x $100,000).
Employees in these situations may want to adjust their 2013 income tax withholding amounts or make estimated income tax payments to account for the additional tax. Self-employed taxpayers subject to the tax will need to increase their 2013 estimated tax payments to cover the additional amount.
Please give this office a call if you have additional questions.