The Payroll Tax Cut Has Expired - Changing Employee Payroll Taxes

Well, at this point (January 1, 2013), it looks like there will be no extension of the payroll tax cut, just as I predicted a week or so ago. This means employers must increase the amount of payroll taxes.

What does this mean for my business?

Since the payroll tax cut has expired, you must add 2% to the Social Security tax that is withheld from employee wages, starting with the first paycheck issued in 2013. Social Security (OASDI) tax is part of the FICA taxes each employee must pay (both Social Security and Medicare taxes). You do NOT have to change the employer portion of the Social Security tax, because this part was not reduced in 2011.

If you use payroll software as part of your company's accounting program, be sure this change is made. If you have a payroll service, check to be sure they are making this change.

You should also inform employees of this change, so you aren't bombarded with questions about "Why is my paycheck smaller?"

Change in Social Security maximum

While you're at it make sure you make changes for the 2013 annual Social Security maximum, which is now $113,700.

What about Self-employment tax?

The self-employment tax amount for 2013 also increased 2% with the expiration of the payroll tax cut, but you don't need to do anything right now, unless you account for this amount internally. This change will be reflected in the amount you pay with your personal taxes for 2013. It doesn't affect the 2012 taxes you are working on now. (Self-employment tax is the Social Security/Medicare tax for self-employed business owners.)

Why did the payroll tax cut expire?

The Washington Post has the story: The payroll tax cut was dropped early in the "fiscal cliff" discussions. So most taxpayers (employees and self-employed) will be paying 2% more in Social Security taxes. The Wall Street Journal has a calculator to show how much individuals will pay in payroll tax.

Source: http://biztaxlaw.about.com/b/2013/01/02/the-payroll-tax-cut-has-expired-changing-employee-payroll-taxes.htm

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