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Will the Social Security Payroll Tax Rate Increase by 2% in 2013?

August 3, 2012 | PrimePay Business and Experts Blog | 25 Comments

payroll tax cut increaseFederal income tax and Social Security tax rates would increase for employees in 2013 if Congress and President Obama fail to reach a compromise to extend some or all of the provisions at the current rates. Employers will need to adjust for the new rates and requirements if they take effect for 2013. As Congress heads into its summer break, conflicting proposals from the Democratic and Republican parties have been introduced to extend all or some of the existing rates.

Other payroll-related provisions scheduled to expire in 2013 include the exclusion of up to $5,250 a year for employer-provided educational assistance and increased tax-free amounts used for adoption assistance.

Pair of Competing Tax Proposals

The proposal by Sen. Harry Reid (D-Nev.), S. 3412, which was passed July 25 in the Senate by a 51-48 vote, would extend tax cuts established under President George W. Bush for single filers with income less than $200,000, head-of-household filers with income less than $225,000, and joint filers with income less than $250,000. Reid's proposal contrasts with a plan offered in the House by Rep. Dave Camp (R-Mich), H.R. 8, which would extend the tax cuts for all taxpayers.

Obama's press secretary said July 25 that the administration is to evaluate by the end of 2012 whether extending the lowered 4.2 percent Social Security tax rate for employees should be pursued for 2013. Last year, action to extend the lowered Social Security tax rate for 2012 occurred in the last two weeks of 2011 and in the first few months of 2012. Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 (Pub. L. 112-78) on Dec. 23, 2011, to extend the Social Security tax cut for the first two months of 2012. On Feb. 22, 2012, Obama signed the Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L. 112-96) to apply the reduced rate for the rest of 2012.

End to Bush Tax Cuts Would Shift Tax Brackets

If Congress does not pass any income tax cut extensions, the four highest-percentage federal income tax brackets automatically would shift Jan. 1, 2013, to 39.6 percent, 36 percent, 31 percent, and 28 percent from 35 percent, 33 percent, 28 percent, and 25 percent.

Part of the tax bracket of 15 percent for 2012 would remain unchanged for 2013, while about the top 20 percent of the wages that would be in that bracket if the tax cuts were extended would instead be taxed at 28 percent if the cuts expire.

The income tax bracket of 10 percent would be merged into the 15 percent tax bracket for 2013.

Social Security Tax Would Increase by 2 Percent

If legislation is not approved to extend the Social Security tax cut, the rate for employees would revert to 6.2 percent from 4.2 percent. The Social Security tax rate for employees had been 6.2 percent from 1990 to 2010.

The employer portion of the Social Security tax, which was 6.2 percent in 2011 and 2012, would not change. Because the employee and employer Social Security tax rates would again be the same, employers would need to make system adjustments to account for the change in the employee rate.

The increased Social Security tax rate is likely to be implemented in conjunction with an increased Social Security taxable wage base for 2013, from $110,100 in 2012. The 2013 Social Security wage base could rise to $114,900, according to Social Security Administration actuarial estimates.

The Internal Revenue Service would need to again modify Form 941, Employer's Quarterly Federal Tax Return, for 2013 if the Social Security tax rate for employees increases. The lines for taxable Social Security wages and taxable Social Security tips would need to be updated to reflect a combined employer-employee rate of 12.4 percent instead of 10.4 percent. This rate modification also would need to be made for Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, and Form 944, Employer's Annual Federal Tax Return.

Other Expiring Provisions

Neither competing proposal to extend the income tax rates into 2013 addresses the expiration of Internal Revenue Code Section 127, the tax exclusion for up to $5,250 in employer-provided educational assistance.

In addition, tax-free adoption assistance benefits would be affected. If Congress does nothing, starting in 2013, the exclusion amount will revert to $5,000 (from $12,650 in 2012) and the income phaseout threshold amount will revert to $75,000 (from $189,710 in 2012). These amounts would no longer be adjusted for inflation.

Medicare Tax Increase

If the Social Security employee tax rate increase occurs, it would not be the only Federal Insurance Contributions Act payroll tax increase to take place for 2013. Employers also would have to adjust FICA processing to include the Additional Medicare Tax rate of 0.9 percent on high earners that is to be implemented starting with 2013. The increase was affirmed by the Supreme Court's 5-4 decision that upheld the majority of the Patient Protection and Affordable Care Act (Pub. L. 111-148).

The withholding tax applies to wages exceeding $200,000.

A $2,500 tax-free limit on health flexible spending account amounts also takes effect Jan. 1, 2013.

Information for this blog article comes from the Bloomberg BNA Payroll Administration Guide Newsletter published on August 1, 2012, Volume 23 Number 16 and was written by Howard Perlman.

 

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Comments

The cap on Social Security base wages of $114,900 should be removed completely! Let the rich people pay more of their share for a change. Maybe dividend income should be subject to Soc.Sec.Tax.
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Although removing the cap on SS would definately increase the coffers,that would not correct the problem. The problem is we need to reduce spending to reduce our $16T+ debt....
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Maybe the so called rich people can opt out of collecting SS when they retire & keep that 6.2% payroll tax? Congress already raided the SS surplus in the 90's anyway. Even if you uncap the SS tax the gov't will spend that money on nonsense.
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payroll cuts or changes
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Yvonne. How about you and I pay exactly the same total dollars in taxes so you pay your "fair share"    
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The problem here is that there is a cap on the base wages AND a cap on Social Security monthly payments. The theory is that the more you contribute to SS, the more your monthly check will be. Therefore, if you remove the cap on wages also remove the cap on monthly SS checks.
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Why not let individuals with pension plans have the option of rolling their SS contributions not, including medicare contributions, into an annuity that they can't cash out or collect from from until they turn 65. The government keeps the employer's portion of the tax and uses that to provide benefits for all those that remain in the system. Let's remember, regardless of what anyone says, SS is not an entitlement to those that contributed towards.
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1) SS Cap: You should be aware that removing the cap on the payroll tax ALSO removes the cap on the amount of benefits receivable.        2) The 2% Reduction to the employees' shares of the SS Tax should never have happened. ALL it did was to make the SS system more unstable by advancing its "failure" (i.e. ability to pay full benefits) earlier by 4 years from 2036 to 2032. It was supposed to stimulate jobs but what it actually did was give a tax break to those already employed, not to those seeking jobs. It was a completely misguided step from the beginning - by an inept and constitutionally unqualified acting president.
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ok i understand the condemnation of the pres, but in reading this article it clearly lays it all on "if Congress does not act" nothing here talks about what the pres has to do, and its all based on what Bush put into place, i just dont understand, why is it ok to trash the dem pres but not ok to trash the republicans?maybe we can read this together.
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SS was foisted upon us because our big brother government was concerned that we were too stupid to save for ourselves. If they really cared about us all this forced saving would have gone into our own government regulated accounts not theirs where over the years it was borrowed, spent and sometimes stolen. Combine that with the fact that the return on our savings was so low it didn't even keep up with inflation and currency devaluation making SS the biggest financial rip off in history. After saving for a lifetime your ss check won't even put you above the poverty line.
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I have to agree that removing the cap on Social Security base wages would not eliminate the national debt but it would bring social security back into solvency. And sometimes we have to fix one problem at a time.
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I dont think they should do it to the middle class because what happens to the people with children and other expenses. He talks about helping the less forunate like the homeless. Ok if he cuts off everything like he said it aint going to help anyone because you will make them people homeless and be back to square one. He wont be helping anyone he'd be in the same situation hes in now.
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Gearing specific services to specific customers shows an understanding of their needs and your value.
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Gearing specific services to specific customers shows an understanding of their needs and your value.
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How about we get rid of all of the loopholes, special brackets, caps, etc.  For SS, this would mean, 6.4% of ALL earned money goes into the SS fund. It also means that there is, as others have said, that there would be no cap on benefits. If we have to have SS, make it fair and simple across the board. Otherwise it is not a retirement savings plan for the people, but instead a tax for the politicians to use and abuse as a bargaining chip.
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when are people who are on social security going to live comfortable.
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Social Security was never designed to be a sole source of income. It was designed to be a supplement to income. Therefore, to "live comfortable" on it is somewhat an imaginery thing.
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How about we start with congresses pay xhecks first of all then how about we close all our ank accounts and stock market accounts and then they can understand the turmoil and stressfulness that they put on us middle class or just low and middle income americans we are broke and thats with two members of the household working if we are broke and homeless and buiesnesses cant remain open due to the goverments greed because they are crying over which one of their pockets or retirment accounts or bonus endorsments will be cut we wouldnt be in this mess.:(
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People on Social Security alone will never live comfortably. You need to save additional money for retirement in a 401K or IRA if you want to live above the poverty line.
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@Yvonne Gunn, They already pay 80% of all taxes collected... that isn't enough?    Why are you entitled to more of their money? 
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@bruce parrish , Why would people think Social Security is their only retirement plan?
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I think Social Security should be paid by all on all wages.     
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"When the people find they can vote themselves money, that will herald the end of the republic."    Benjamin Franklin
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For 46 years while being part of the full-time work force, I was always told that a Social Security tax (deduction) from my check was to be able to have SS benefits when I retire. I am now retired however I continue to work part-time just to make ends meet. What concerns me is the fact SS is still being deducted from my paychecks . Other than the cost of living increase some years, my benefit amount will never change and I don't require medicare since I am a Vietnam combat Vet. For these reasons, I question as to where the SS being deducted since my retirement in 2010 is going !!!
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Problem is that 47% of Obama's voters don't work so they have no payroll tax increase and thus will not complain. Workers will just pay it and shut up. Time we spoke up loud and clear. This is unAmerican.
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