In addition to the normal IRS annual adjustment to the Social Security wage base (increased from $110,100 to $113,700), the withholding rates for both Social Security and Medicare are changed for 2013. For many years, the Social Security tax rate has been 6.2% up to the wage base while the Medicare tax rate has been 1.45% on all taxable wages. For the past two years, the employee Social Security withholding rate was reduced to 4.2% while the employer tax remained at 6.2%. Effective January 1, 2013, the Social Security withholding rate reverted back to 6.2%. In addition, under the 2010 Patient Protection and Affordable Care Act, an additional 0.9% of Medicare tax is required to be withheld from an employee’s wages in excess of $200,000. Consequently, Medicare tax must be withheld at 1.45% on employee’s wages up to $200,000 and 2.35% on wages in excess of $200,000 for 2013. These changes do not affect the employer portion of either tax, which remains at 6.2% Social Security up to the wage base plus 1.45% Medicare tax on all wages.

The individual liability for the additional 0.9% Medicare tax is calculated on different thresholds depending on the individual employee’s filing status ($250,000 married filing joint, $125,000 married filing separately, and $200,000 single). Consequently, the actual tax liability may not equal the amount withheld. Regardless of the individual’s situation, the employer must withhold the additional tax on wages in excess of $200,000. If an employee believes the additional Medicare tax liability and/or withholding will result in an under or over payment, they can adjust their federal withholding using Form W-4 accordingly. The IRS has issued a set of frequently asked questions on the new withholding requirements, which are available on their website at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax.

On December 31, 2012, the IRS released withholding tables for 2013 in anticipation of the income tax rate changes. As a result of the January 1, 2013 legislation, those withholding tables were incorrect. Revised percentage method tables were issued by the IRS on January 3, 2013 in Notice 1036. The notice is available on the IRS website at www.irs.gov/pub/irs-pdf/n1036.pdf.

Employers are urged to use the revised withholding tables and the correct Social Security tax rates as soon as possible, but not later than February 15, 2013. Under-withheld Social Security tax must be corrected by March 31, 2013.

By Donna A. Hubert, CPA, Partner, dhubert@legacycpas.com