With so many upcoming tax law changes, many of which are still up in the air, employees may be starting to feel the financial stress of worrying how these changes will impact them.
Now is a great time to start planning for a year-end tax education workshop for your workforce to help prepare them for the following tax law changes:
1. Payroll tax relief will probably end
For the past two years, employees have had a break on the amount they were paying into Social Security under the Federal Insurance Contributions Act (FICA), which was reduced from 6.2 percent to 4.2 percent for 2011 and 2012. This amounted to a savings of up to $2,202 based on this year’s wage cap of $110,100 so your employees need to be prepared to see a reduction in their take home pay and will need to adjust their budget.
For high income employees, their FICA tax will also increase due to the higher wage cap of $113,700. The Social Security Administration estimates that nearly 10 million workers will pay higher taxes as a result of the higher wage cap.
2. Medicare tax increases for some employees
The same high income workers who will see an increase in their Social Security tax may also be impacted by an increase in the Medicare tax if they have earned income over $200,000 for single workers or $250,000 for married workers.
On amounts above these thresholds, the employee portion of the Medicare tax will jump to 2.35 percent instead of the current 1.45 percent tax. In addition to this higher tax on earned income, their passive income such as dividends, capital gains, and interest could also be subject to an additional 3.8 percent Medicare tax.
3. Health care reform expands
Employees will begin to see the cost of group health coverage reported on box 12 of their W2, so head off the multiple calls you could get by reassuring them now that this amount will not be taxable – at this point it is for informational use only.
Flexible Spending Accounts (FSA) will be limited to a maximum contribution of $2,500 for 2013, and for any employee who faces high out of pocket medical costs, the threshold for itemizing medical expenses increases from 7.5 percent to 10 percent for tax year 2013. These changes make an Health Savigs Account (HSA) all the more attractive, so employees need to be educated on the many advantages of moving to an HSA and a high-deductible health plan.
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4. Retirement plan contribution limits increasing
For 2013, employees will now be able to contribute up to $17,500 ($23,000 if 50 or older) to their 401(k), 403b, or 457 plan. In addition, another $5,500 ($6,500 if 50 or older) can be contributed to an IRA. Many employees don’t realize these amounts are separate from each other, and there is still quite a bit of confusion about the difference between a Roth 401(k) and Roth IRA.
Your workers also need to be reminded about the Saver’s Credit, which could provide up to a 50 percent credit on the first $2,000 of retirement plan contributions for your lower income employees, and which also saw a slight increase to the wage thresholds for qualifying for the credit in 2013.
To bring your workforce up to date on these tax law changes, bring in tax professionals to do the job of educating your employees. However, be cautious about bringing in a local tax preparer, since their main goal may be to solicit future tax preparation customers. Working with an unbiased financial education provider will alleviate that risk.
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.