WHAT YOU NEED TO KNOW ABOUT YOUR NEW TAX RATE

 ENTITLEMENTS ARE COSTING MORE

What You Need to Know About Social Security and Medicare

The year 2013 is bringing new changes to the rate of tax we pay for both Social Security and Medicare. We already know that the Medicare surtax of 3.8% on capital gains went into effect beginning in 2013. But there are other changes as well and both employers and employees need to know what they are. I address two key changes here, one made by the American Taxpayer Relief Act of 2012 (the Act), and the other, a temporary tax code provision that is now expired. These changes mean increased taxes for every wager earner in the country.
        
1. New Medicare Tax         
In addition to the 3.8% surtax on certain capital gain income, the Medicare tax also increases for employees. Beginning in 2013, the tax goes up by 0.9% on earned income over $200,000 for single filers and $250,000 for joint filers. This hike is referred to as the “Additional Medicare Tax.” The Medicare tax rate for employees is 1.45% of wages up to the threshold and 2.35% of wages over the threshold. The employer portion of the Medicare tax remains at 1.45% of wages. For self-employed persons, the rate is 2.9% of wages up to the threshold and 3.8% above the threshold.
        
According to the IRS, employers must withhold the Additional Medicare Tax from wages in excess of $200,000 in a calendar year, regardless of the person’s filing status or the amount of wages paid by another employer. Given this directive, there are sure to be situations where this rigid withholding rule leads to either an underpayment or overpayment of the tax.
        
For example, suppose one spouse has salary of $170,000 and the other spouse has salary of $105,000. In that case, each spouse’s employer will treat its employee as earning below the Medicare tax threshold. As such the employer will withhold using the lower rate of 1.45%. However, because this couple has combined earned income of $275,000, they are over the threshold ($250,000) by $25,000. This means they are subject to the 2.35% rate on $25,000.

If this is your situation, you can fix the problem of under-withholding and avoid penalties and interest by either making an estimated tax payment using Form 1040ES or by requesting additional wage withholding using Form W-4. I suggest the former strategy as it is a much more precise way to pay additional taxes without creating a substantial overpayment.

An overpayment could arise in a situation where a married couple has a combined income below the threshold, but one spouse has income over $200,000. For example, say one spouse’s salary is $225,000 and the other’s is $15,000. The employer of the first spouse will withhold the additional tax based upon $25,000 even though the couple’s combined income is less than $250,000.

In that case, you will end up with a credit for the overpaid Medicare tax. That credit is then claimed on Form 1040. However, employers are not permitted to reduce Medicare withholding if they are otherwise required to withhold it.
        
2. The Social Security Tax “Holiday” is Over
        
For tax years 2011 and 2012, Congress reduced the Social Security tax rate for employees from the usual rate of 6.2% to 4.2% of wages. The employer rate of 6.2% of wages did not change. This naturally led to reduced Social Security tax withholding from the paychecks of every employee in the nation. But that was merely a temporary measure. It was designed to help Americans weather the financial storm. It was referred to a Social Security tax “holiday.”

Well, the holiday is over. Congress did not extend the payroll tax cut. Therefore, effective January 1, 2013, the Social Security tax rate for all employees jumped back up to the rate of 6.2% of wages. This hike is effective for 2013 and the years following, unless another “holiday” is declared. Don’t hold your breath.

This explains why every paycheck in America was smaller beginning January 2013. Despite all the talk about how the American Taxpayer Relief Act of 2012 was going to reduce everybody’s taxes, many overlooked the Social Security tax hike. President Obama made it clear that he was not in favor of extending the reduction through 2013. As such, we all knew that the taxes of every worker in American would rise despite the hollow promises that the American Taxpayer Relief Action of 2012 saved us all from tax hikes. 

Source: Pilla Talks