For the last two years employees have enjoyed a 2% discount on their portion of payroll taxes. Social Security withholding is set at a rate of 12.4% on wages up to a maximum of $110,100, but that maximum income level rose to $113,700 in 2013. For the last two years, employers paid 6.2% in payroll taxes, half of the expected contribution, and employees paid 4.2% with the payroll tax cut in effect. That put about $80 extra in the pocket of the average wage earner each month for the last two years.
But now, the employee share of payroll tax in 2013 has returned to 6.2% and additional action is needed by Congress to reduce the payroll tax in 2013. The 2013 federal budget presented by the White House and the Treasury Secretary includes a temporary extension of the payroll tax cut, but the budget has not yet been passed by Congress and is expected to be a point of much debate in early 2013.
Payroll taxes for 2013 are an important part of calculating business expenses for the upcoming year. When estimating costs associated with employees, business owners must also consider:
- Workers’ compensation insurance
- Unemployment insurance
- Employee benefit programs
- Optional benefit packages (such as profit-sharing programs)
Forty years ago, payroll taxes and corporate income taxes provided a relatively equal share toward federal income tax revenue, but today payroll taxes generate more than six times as much revenue. Costs associated with Social Security and Medicare — in particular the disability portion of the Social Security program and Medicare Part A — are putting increasing pressure on lawmakers to raise payroll taxes.
The White House has proposed a plan that calls for a reduction of payroll taxes for both small businesses and employees. In one budget, the White House proposed a 50% discount on payroll taxes for up to the first $5 million in payroll for a business, with individuals also saving 50% on their payroll taxes, or 3.1% of their earned income.
Proponents of this plan say it puts more money in the pockets of small businesses and middle class wage earners, which would drive economic growth. But opponents to this plan disagree. They say reducing taxes on the middle class would push the payroll tax burden to small business owners and job creators. The result of this disagreement is that negotiations are in place which will affect payroll taxes in the future, depending on what Congress can agree on.
What Are Payroll Taxes?
Payroll taxes include 12.4% of earned income to pay for Social Security for earned amounts up to $113,700, plus an additional 2.9% to pay for Medicare, with no annual limit. Also included in payroll taxes are federal and state unemployment (paid for by employers), and in some states outside of California other types of taxes are required. Employee payroll taxes also include State Disability Insurance contributions, as well as federal and state income tax.
Payroll taxes are authorized by the Federal Insurance Contributions Act (FICA). Half the FICA amount is paid for by employers, and the other half is paid for by employees. Those who are self-employed must pay the entire amount. As mentioned, payroll taxes also include all income taxes and any necessary unemployment insurance.
Because income taxes are withheld from employee payroll paychecks each pay period, they are referred to as withholding taxes. Each new employee fills out a W-4 form from the IRS, and that form is used to calculate the amount of payroll taxes that must be withheld from each paycheck.
To stay up-to-date with the latest payroll news and 2013 payroll tax requirements, contact your payroll tax specialist or visit the IRS website. The Employer’s Tax Guide is IRS Publication 15, Circular E. You may also want to visit the California State Tax Service Center.