After a heated debate and a prolonged vote, the House of Representatives voted 257-167 to approve a bill to prevent the fiscal cliff. The main purpose of this vote was to extend the Bush era tax cuts, which currently affect approximately 98% of taxpayers. However, according to Forbes, 77% of Americans will actually end up paying higher taxes in 2013. One of the most talked about subjects was how these taxes will affect an employee’s net pay, commonly referred to as “take home pay”. The following is a brief breakdown of the most common taxes that will be impacting your wages.

A)     Employee Portion of Social Security Tax Withholding

1. This payroll tax cut expired on 12/31/12 as congress failed to act on time. What this eliminated was a 2% reduction in employee payroll taxes, increasing the Social Security Tax from 4.2% to 6.2%. The combined FICA tax rate (which is the Social Security tax at 6.2% and the Medicare tax at 1.45%) is now 7.65% for 2013 up to the Social Security wage base ($113,700). This will be an increase of $2,425.20 in taxes for employees. There are ongoing talks and bills being considered in Congress to extend the 2% reduction, but until a change occurs, the new rate of 6.2% will remain in place.

B)      Social Security Wage Base

1. The Social Security wage base will be increased to $113,700. This has been increased by $3,600 from 2012, meaning you will pay the Social Security tax on all wages up to $113,700.

C)      Medicare Tax

1. In 2013, the Medicare tax of 1.45% will be increased to 2.35% for wages in excess of $200,000.

D)     Federal Income Withholding Tax:

1. The amount of federal income tax that you owe on each check may be affected as well. Individual taxpayers will still be subject to the current tax rates of 10/15/25/28/33 and 35% (percentage of tax based on your income level) up to the $400,000 (or $450,000 for joint filers) income threshold. There has been a new top tax rate of 39.6% for individuals that have income higher than $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married filing jointly. The IRS has published an updated tax table where you can determine your exact taxable rate, which can be found at http://www.irs.gov/pub/irs-pdf/n1036.pdf.

E)      Health Flexible Spending Arrangement

1. In 2013, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending account is $2,500, which has been reduced from a $5,000 limit.

F)      Non-Payroll Tax Updates

1. Capital Gains and Dividends – Increase to 20% for income earners exceeding $400,000, unchanged (15%) for earners below that mark.
2. Itemized Deductions and Personal Exemptions – Phase out of taxpayer’s itemized deductions and personal exemptions return, but only for high income earners ($250,000 for single taxpayers, $275,000 for head of household, and $300,000 for married filing jointly).
3. Alternative Minimum Tax (AMT) – Exemption amounts have been determined for inflation. For 2012, exemption amounts are $78,750 for married filing jointly and $50,600 for single filers.
4. Estate and Gift Taxes – Exemption will remain at $5M, but the rate will increase from 35% to 40%.
5. Increased Child Tax and Earned Income Credits have been extended for five years.

With all the current changes of taxes, and the ongoing struggles on Capitol Hill, there is a chance that new bills could be signed into law that will change the current payroll tax schedule. Be assured, TargetCW will always provide you with the most up to date and accurate taxation schedule for employees, and we will inform you of any additional updates in the coming months. If you have any questions, you can contact me directly at ryan@targetcw.com.