Now that Congress has mostly averted falling off the fiscal cliff by penning The American Taxpayer Relief Act of 2012, some employees may have a false sense of confidence that the Act only will impact the wealthy.
The message we are hearing is that the middle class has been spared from a tax increase, but that’s not necessarily true. Your employees will have an unpleasant surprise with their first paycheck of the New Year in 2013 since the temporary reduction of 2 percent on the employee portion of the Social Security tax that we’ve had for the past two years was allowed to expire.
As of January 1st, the tax increases back to 6.2 percent on the first $113,700 of earned income.
Tax change must be made by Feb. 15
According to IRS Notice 1036, employers should implement the 6.2 percent employee Social Security tax rate as soon as possible, but not later than February 15, 2013. For an employee who is paid twice a month and makes $50,000 a year, this will mean an additional $41.67 deducted from their paycheck. This may not sound like a significant difference, but for employees who live paycheck to paycheck, any reduction to their net pay can create a financial hardship.
For your highly compensated employees, this stealth tax increase will be felt even more heavily.
In addition to the extra $2,274 they will pay towards Social Security, those with annual incomes over $200,000 will be subject to an additional Medicare withholding of .9 percent. If you handle payroll duties, you are required to begin withholding Additional Medicare Tax in the pay period in which you pay wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year.
Help with money management skills
From an employer perspective, the Additional Medicare Tax is only imposed on the employee – there is no employer share of Additional Medicare Tax beyond the standard 1.45 percent.
These increased withholding deductions make it even more critical to assist your workforce with basic money management skills and the basics of tax law changes. Help your employees avoid falling off their own fiscal cliff this month by focusing on their financial wellness.
Remind your workforce to review their tax withholding and if available, highlight your workplace financial coaching benefit so your employees can take advantage of a financial check up, whether that’s accessible over the phone or as an in-person session.
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.