2013 FICA tax increase surprises some Taxpayers [UPDATED]Published 9:43am Monday, January 21, 2013 Updated 11:44am Monday, January 21, 2013
With all the end-of-year hype surrounding the fiscal cliff and the relief that came with New Year’s legislation permanently extending most income tax rates, one change seems to have been veiled by the settling dust: the 2 percent increase in FICA tax.
That increase means that the vast majority of American workers are now receiving about 2 percent less in their take-home pay, an unwelcome surprise to some people.
In the midst of the last recession, Congress passed and the president signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This new law included a 2 percent reduction in the Social Security portion of the FICA tax.
The provision was designed to help put a little more money into the wallets of American workers during the challenging economic environment of 2011.
While the employer portion of the contribution remained at 6.2 percent, the employee contribution was reduced from 6.2 percent to 4.2 percent.
The provision was extended through 2012.
The reduction was never meant to be permanent, as it put additional financial pressure on the already stressed Social Security Trust Fund.
So during the 2012 fiscal cliff negotiations, both Democrats and Republicans agreed that it should expire at the end of the year.
Despite media reports warning of the impending payroll tax increase, many Americans were caught off guard when they received their first paychecks in 2013.
How much of an impact might the additional withholding have?
A family earning $60,000 a year will see their pay cut by about $1,200, or $100 per month, during 2013. Those earning $100,000 will receive about $2,000, or about $167 per month, less.
While most experts believe the decrease in take-home pay won’t be enough to cause major economic damage, it may encourage families to cut back on spending enough to slightly dampen the nation’s overall growth.
For example, the 2 percent decrease could represent a family’s monthly utility bill, an investment in a college savings account, or a week’s worth of groceries.
Also consider that high earners will need to pay a bit more in Medicare taxes beginning in 2013. Taxpayers will pay an additional 0.9 percent Medicare tax on wages exceeding $200,000 for single/head of household, $250,000 for married couples filing jointly, and $125,000 for married couples filing separately.
Taxpayers whose modified adjusted gross income exceeds those same threshold amounts will also pay a 3.8 percent Medicare tax on some or all of their unearned income.
When combined with the 2 percent Social Security increase, the total hit could mean a difference of several thousand dollars a year to some higher-earning taxpayers.
If you have questions about your FICA withholding, your human resources department or personnel manager might be a good place to start.
These representatives are typically prepared to answer such questions and can help you confirm that your withholding is correct.
Bonnie Denzel is a financial advisor with Dorn and Co., in Fergus Falls.