The Social Security tax for 2013 reverts back to its normal rates. The tax rate for 2013 is:
- Employee-portion: 6.2% of wage earnings, up to the maximum wage base of $113,700;
- Employer-portion: 6.2% of wage earnings, up to the maximum wage base of $113,700;
- Self-employed persons: 12.4% of net self-employment income, up to $113,700.
The Social Security tax rate had been temporarily reduced for the years 2011 and 2012, in what was referred to as a payroll tax holiday. For these two years, the employee-portion of the Social Security tax was reduced from 6.2% to 4.2%. Self-employed persons also received the same reduction from 12.4% to 10.4%.
The temporary rate reduction for Social Security taxes was not extended as part of the American Taxpayer Relief Act. The reduced Social Security tax thus expired at the end of 2012, as it was scheduled to do.
The payroll tax holiday was enacted as a one-year-only provision for the year 2011 as part of the Tax Relief Act. It was further extended through February 2012 by H.R. 3765, and then extended again through the end of 2012 by H.R. 3630. Even though the tax rate was reduced, Social Security actually received the same amount of revenue as there was a special rule that directed the Treasury to transfer revenues from the General Fund to the Social Security Trust Fund to make up for the tax holiday. (You can read more about this particular provision in my article on Social Security taxes.)
Planning Issues for Self-Employed Persons
The reduced Social Security tax rate will impact year 2012 tax returns, especially for self-employed persons. The self-employment tax on a year 2012 tax return will reflect the reduced 10.4% Social Security tax along with the 2.9% Medicare tax, for a combined self-employment tax of 13.3%.
Self-employed persons will also need to start setting aside funds towards their 2013 taxes and making estimated tax payments. The normal rule for calculating estimated tax payments is to pay in for 2013 at least 100% of the federal taxes that were due in 2012. However, using the default method could result in underpaying taxes since the self-employment tax will be higher for 2013. Now, the IRS will not impose an penalty on underpaying estimated taxes if tax payments for 2013 are at least 100% of year 2012 federal tax liabilities.
Self-employed persons may want to calculate their 2013 estimated tax amounts assuming the full self-employment tax rate of 15.3% so as to be able to set aside enough funds to cover their taxes in full. The planning opportunity I detect is two-fold. On the one hand, it's important to know what the 2013 tax will be so that self-employed persons can set aside enough funds to cover the tax. And to do that, we'll need to look beyond the 2012 tax liabilities figures we see on the tax return and run a calculation using 2013 tax rates. On the other hand, the IRS won't impose an estimated tax penalty as long as estimated tax payments are at least equal to 2012 tax liabilities (which could be lower than 2013 tax liabilities on the same amount of income). In looking at these two factors, self-employed persons may be able to set aside the differential between their 2012 and 2013 federal taxes in a savings account and earn a little bit of extra interest.
Planning Issues for Employees
Employers should start withholding Social Security taxes at the 6.2% rate. Be sure to review your paychecks to confirm that your employer is withholding the correct amounts. The IRS on January 1, 2013, issued temporary guidance to employers regarding tax withholding. The IRS instructed employers:
"For 2013, the employee tax rate for social security increases to 6.2%. The social security wage base limit increases to $113,700.
"Employers should implement the 6.2% employee social security tax rate as soon as possible, but not later than February 15, 2013. After implementing the new 6.2% rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of social security tax as soon as possible, but not later than March 31, 2013." (Notice 1036, IRS.gov)