On New Year’s Day, Congress passed legislation that affects the paychecks of all Americans, by not extending the reduction in Social Security, or FICA, withholding for all employees. There are also additional income tax and Medicare changes for those earning over $200,000 annually.
The change in FICA impacts all employees. The 2% reduction in FICA payroll tax to 4.2% employees received in 2011 and 2012 was not renewed by Congress. Beginning January 1st, the Social Security tax rate paid by employees is 6.2%, matching the rate paid by employers. This increase results in a 2% reduction in net pay for all employees across the board. The maximum amount paid by individual employees and by employers for each employee is $7,049.40 (www.forbes.com).
FICA and Medicare Maximums
For 2013, FICA withholding is assessed against all earnings up to $113,700. All wages are subject to the Medicare tax of 1.45%. In addition, employees earning in excess of $200,000 are subject to an additional Medicare tax of 0.9% on all wages in excess of $200,000 through the calendar year. This means if an employee has earned $200,000 by August 31, 2013, the wages for the remainder of the year are subject to the regular Medicare tax of 1.45% and the additional Medicare tax of 0.9% (www.purdue.edu).
Tax Changes Based on Income
Tax cuts were extended to all single employees who make less than $400,000 annually and couples who make under $450,000 combined in 2013. For employees making under this threshold, they will find that their effective tax rate is unchanged. For those employees who make over these thresholds, they will see an increase in the top tax rate to 39.6% up from 35% (www.purdue.edu).
These changes went into effect January 1, 2013. The IRS is in the process of updating Form W-4 for employees wishing to change their withholding to make adjustments for the 2% decrease in net pay.
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