Advice for Employers in 2013 from the APA (American Payroll Association)
Other rate changes take effect on January 1
How to calculate withholding without 2013 withholding tables is certainly not the only unresolved issue for payroll as January 1 approaches. If Congress does not act by then, other withholding changes will take effect that do not depend on new withholding tables.
- Supplemental withholding rates increase. For supplemental wage payments (e.g., bonuses) made on or after January 1, 2013, the optional flat rate for amounts up to $1 million in a year increases from 25% to 28%. For supplemental wage payments made on or after January 1, 2013, the mandatory flat rate for amounts over $1 million in a year increases from 35% to 39.6%. Remember that these rates apply when the payments are made, not when they are earned.
- Backup withholding rate increases. The rate of withholding on payments that are subject to backup withholding because of a missing or incorrect Taxpayer Identification Number increases from 28% to 31% for payments made on or after January 1, 2013.
- Employee social security tax rate increases.The payroll tax cut that reduced the employee share of social security tax from 6.2% to 4.2% in 2011 and 2012 expires on December 31, 2012. Therefore, social security tax must be withheld at the rate of 6.2% from employees’ wages paid on or after January 1, 2013.
Other fiscal cliff issues for payroll
- Educational assistance exclusion expires. Currently, employers can provide employees with up to $5,250 in nonjob-related tax-free educational assistance under IRC §127. However, §127 expires on December 31, 2012. Therefore, amounts paid on behalf of or reimbursed to employees under a §127 educational assistance plan on or after January 1, 2013 are taxable and must be treated as supplemental wage payments. This is true even if the education was provided to the employee in 2012, but the payment is not made until 2013.
- Exclusion for certain health profession scholarships expires. On December 31, 2012, the income exclusion for amounts paid for services under §117(c) for certain government health professions scholarship programs expires.
- No new tax levy tables. The IRS also has not issued Pub.1494 for 2013, with the tables showing the amount of wages exempt from a federal tax levy. Therefore, tax levy notices sent by the IRS will continue to contain the 2012 Pub. 1494 amounts until a new edition is published.
- WOTC expansion for veterans expires. The Work Opportunity Tax Credit (WOTC) expansion for hiring certain qualified veterans is not available for those hired after December 31, 2012.
- Some adoption assistance provisions expire. Certain provisions under §137 related to employer-provided adoption assistance expire on December 31, 2012, resulting in lower income exclusion amounts and lower maximum income amounts for eligibility.
SBS is already configured to these guidelines and is also ready to make any changes that may be enacted. We will continue to keep you informed as to the status of 2013 tax changes.