Payroll Consequences of the Fiscal Cliff


Wrangling over tax cuts in Washington may send tax payers over the fiscal cliff and result in higher payroll taxes.
You have to be either deaf, dumb, dead or just don’t pay attention to the news to have not heard of the “fiscal cliff” or as some less informed have called it the “physical cliff.” There are a lot of things that are going to happen in this country if some accord is not reached. Or course there are some that say we should go over the cliff and rebuild after that wreck. I am not going to argue one way or the other. But because there are changes that will occur I am going to tell you about some of the payroll consequences of the fiscal cliff.
Payroll taxes
Recall that nice 2% rollback we had a couple of years ago which reduced the employee’s share of the Social Security payroll taxes? Well that is going to disappear. (See how quickly things become an entitlement? There is a lesson in there for you compensation planners.) As an employer you have to start withholding 6.2% as of 1/1/2013 rather than the 4.2% you currently withhold. I would suggest you break that news to your employees before that happens otherwise you are going to be inundated with uniformed employees complaining about how their paycheck is wrong. Oh by the way all you self-employed types are going back to 12.4%.
PPACA increase
If you have employees who are making over $200k as an individual or $250k as a couple they are going to have an increase in Medicare as a result of the new healthcare rules. As an employer you will need to communicate this and make sure it is being withheld. According to the folks at McDermott, Will & Emory:

 “Because this withholding is required on an employee’s wages over $200,000, which does not particularly correlate with an employee’s ultimate tax liability, many employees, particularly those who are married, may find that they are over- or under-withheld, depending upon the earnings of their spouse.  For example, if a husband and wife each earn $200,000, with joint wages totaling $400,000, this couple will be under-withheld because their respective employers will withhold nothing.  However, the additional 0.9 percent tax for them is owed on combined wages over $250,000, resulting in an under-withholding of $1,350 ($150,000 times 0.9 percent).”

If you bonuses that are earned in 2012 but would not normally be paid until 2013 you may want to consider trying to accelerate those payments into 2012. Your employees would greatly appreciate that consideration. Otherwise your delay will be costing them money. Warren Buffet may not notice but the rest of us would.

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