2013 Tax Changes
2012 and into 2013, numerous legislative changes affecting all Americans were
enacted or allowed to expire. Many significant changes were made to tax laws
that will have a direct effect on employers across the country in 2013.
The American Taxpayer
Relief Act of 2012
New Year’s Day 2013, Congress passed House Resolution 8, the American Taxpayer Relief Act of 2012,
making permanent many of the Bush-era tax cuts and avoiding mandatory spending
cuts that were set to go into effect on January 3, 2013. The tax cuts were
extended for most workers, with exception of those in highest bracket
(individuals with taxable annual income of more than $400,000 and married
couples with income in excess of $450,000). The new tax bracket for those
high-income earners is now set at 39.6%. Additionally, withholding allowance amounts
have increased for tax year 2013; one withholding allowance is set at $3,900
annually for 2013, up from $3,800 for 2012.
Federal income tax
used to calculate the withholding taxes for 2013 will remain the same for many
employees. The tax brackets are 10%, 15%, 25%, 28%, 33%, 35% plus the new 39.6%
bracket. The supplemental wage flat rate remains at 25%, however, the mandatory
supplemental flat-rate withholding is increased from 35% to 39.6% for those
with incomes greater than $1 million. The backup withholding rate remains at
28%. The IRS has posted Notice 1036, Early Release Copies of the 2013
Percentage Method Tables for Income Tax
Withholding, on their website. The IRS recommends checking the IRS website regularly
for updated information on Notice 1036 including information about legislation
enacted after the notice was published.
Many states have also updated their withholding
tables for 2013. Be certain to check your individual state’s website for
information on state income tax rates and tables. The American Payroll
Association’s website has a page of links to individual state government websites.
Other provisions in the Act include:
- A permanent extension of the $5,250.00 annual tax-free employer-provided educational assistance (IRC 127).
- A permanent extension of employer provided adoption assistance (IRC 137).The maximum that may be excluded from an employee’s gross income under the employer’s plan is $12,970 for 2013. The amount excludable from gross income begins to be phased out with an adjusted gross income of $194,580 and is fully phased out at $234,580 in 2013.
- One-year extension of parity for the 2012 qualified employer-provided
transportation fringe benefit under IRS Code Section 132 (f), retroactive to January 1, 2012. For 2012, the parking benefit was $240 per month and the mass transit and vanpooling benefit was set at $125 per month. The Act provided a retroactive increase in the mass transit and vanpooling benefit to $240 per month for tax year 2012. The monthly limitation for 2013 is $245 per month for the parking benefit as well as the mass transit and vanpooling benefit.
- One-year extension of the Work Opportunity Tax Credit limited to unemployed
military veterans. The “Returning Heroes” tax credit provides a credit to employers of up to $2,400 for hiring veterans who have been unemployed for more than four weeks, or up to $5,600 for hiring veterans who have been out of work for over six months. The “Wounded Warrior” tax credit continues the previous WOTC credit to employers of up to $4,800 for hiring veterans with
service-connected disabilities; however, it now provides a new credit of as much as $9,600 to businesses that hire a veteran with a service-connected disability who has been unemployed for more than six months.
- Adds IRC 402A(c)(4)(E) under which an employee can transfer savings from a 401(k), 403(b), or 457(b) plan account to a designated Roth account. The retirement plan must have a qualified Roth contribution program. Transfer amounts are taxable at the time of the transfer and treated as qualified rollover contributions to the Roth account.
Deferral Plan Limits
The limit for elective deferral plans, such as
401(k), 403(b) and 457(b), increased from $17,000 for 2012 to $17,500 and the SIMPLE
plan limit increased to $12,000 for 2013. The 2013 catch-up contribution limit
for employees age 50 or over remains at $5,500.
Social Security Wage
Social Security wage base is the maximum amount of earnings against which the
Social Security tax can be applied. It increased from $110,100 in 2012 to $113,700
The “Payroll Tax
The “payroll tax holiday” was created to temporarily reduce
the employee Social Security tax rate. In 2011, the Tax Relief, Unemployment
Insurance Reauthorization and Job Creation Act of 2010 reduced the employee
portion of the Social Security tax from 6.2% to 4.2% on the first $106,800 of
wages earned (the Social Security wage base for 2011). The Temporary Payroll
Tax Cut Continuation Act of 2011 extended the reduction of the employee portion
of the Social Security tax through February 29, 2012 and Congress later voted
to extend the tax cut through December 31, 2012. When the extension expired on
December 31, 2012, the Social Security rate for employees returned to the
historic rate of 6.2% for 2013. The employer rate did not change and remains at
Rate for Vehicle Use
The standard mileage rate for business use of a
vehicle increased to 56.5¢ per mile effective January 1, 2013.
Beginning with 2012 Form W-2 (generally issued to
employees in January of 2013 for the 2012 calendar year), businesses that file
more than 250 Forms W-2 are required to report the cost of employer-sponsored
health coverage on the forms. Employers that file fewer than 250 Forms W-2 in
the previous calendar year are not required to report this information for 2012.
According to IRS Notice 2012-9, this exemption is expected to
continue in 2013 and subsequent years until further guidance is issued.
Additional information on how to report health care costs on an employee’s Form W-2 is available on the BenefitMall website.
Business Health Care Tax Credit
Small employers with the equivalent of fewer than 25
full-time equivalent employees who pay an average wage of less than $50,000 per
year and pay at least 50% of single health coverage for employees may be
eligible for the Small Business Health Care Tax Credit. Small business
employers may be able to apply up to a maximum of a 35% credit; small
tax-exempt employers may be eligible for up to a 25% credit.
IRS Form 8941, Credit for Small Employer Health Insurance Premiums, must be used to calculate the credit. Small businesses should include
the amount of the credit as part of the general business credit on their income
tax return. Tax-exempt employers should file the tax credit amount on line 44f
of IRS Form 990-T, Exempt Organization Business Income Tax Return. The credit can be taken for tax years 2010 through 2013. Employers that
did not take the credit in previous years can still file an amended return and
take it now.
Please visit the IRS website for additional
information on the Small Business Health Care Tax Credit.
Unemployment insurance (UI) is a program established
by the Federal Unemployment Tax Act (FUTA) that is jointly financed through
federal and state employer payroll taxes. Currently, the FUTA tax rate is set
at 6.0% applied to the first $7,000 of taxable wages; however, most employers
do not pay a FUTA rate of 6.0%. Historically, employers who pay their state
unemployment tax on time receive an offset FUTA credit of 5.4%, resulting in a
net FUTA tax rate of 0.6% for those employers.
In 2012, businesses in 18 states and the U.S. Virgin
Islands found themselves paying a higher FUTA tax rate because their FUTA
offset credit was reduced. This happened because states that borrow money from
the federal government to fund their state unemployment programs have two years
to repay their loan in full. If the loan is not paid in full on or before
November 10 of the second tax year, employers in that state lose 0.3% of their
available FUTA credit, resulting in a higher FUTA tax rate.
Medicare Tax Goes into Effect
The Patient Protection and Affordable Care Act
(PPACA) created a new Medicare tax effective January 1, 2013. The additional 0.9%
tax will apply to single taxpayers with a modified adjusted gross income of
$200,000 or higher and married taxpayers with a modified adjusted gross income
at or exceeding $250,000. The tax also will apply to a married person filing
separately whose modified adjusted gross income exceeds $125,000. Taxpayers
with modified adjusted gross incomes below these amounts will not be subject to
The IRS Small Business
and Self-Employed Tax Center is an excellent
resource for state and federal legislative and tax changes. Payroll and tax
professionals will also benefit from visiting the Payroll Professionals Tax Center and the Issue Management Resolution System (IMRS) “Hot
Issues” page of
the IRS website on a regular basis. Information
about the American Tax Relief Act of 2012, is also available on the IRS website.
Additional information on the Returning Heroes and Wounded Warriors Tax Credits is available on the White House website.