Fiscal Cliff: Payroll Department Take Note!

With Congress averting the plunge off the fiscal cliff, here's a couple of items for payroll professionals to take note of.

H.R. 8, The American Taxpayer Relief Act of 2012, made permanent Bush-era tax rates for all but the highest earners.  This means no tax increase in income tax rates for employees taxed at the 10%, 15%, 25%, 28% and 33% rates.  It is anticipated that President Obama will sign the bill this week.  H.R. 8 also includes a few other payroll provisions including; the employer wage credit for employees who are on military leave is extended retroactive to January 1, 2012 and will expire on December 31, 2013; and, employer-provided educational assistance under tax code Section 127 is permanently extended.

Effective January 1, employers must resume withholding at the 6.2% Social Security payroll tax.  Congress declined to extend the payroll tax economic stimulus that took place in 2011 and 2012 in which the employee's share of payroll tax was lowered to 4.2%.  Underwithholding should be corrected as soon as possible, but not later than March 31, 2013.  Consider notifying employees this week of changes that will impact their take-home pay! The increase to 6.2% for employees means that an employee with an income of $50,000 to $75,000 will pay an average of $985 more in taxes. 

On January 1 the IRS released the 2013 Percentage Method Tables indicating that employers should implement the 2013 tables ASAP, but not later than February 15th.  Unfortunately these tables do not reflect the H.R. 8's tax brackets.  Keep an eye out for updated tables.  In addition to reissuing the 2013 withholding tables, we're waiting on the release of the 2013 Form W-4.

Happy New Year!