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Expiration of Social Security payroll tax break stays under radar

NEW ORLEANS — CPAs are busy fielding questions on topics ranging from the end of the Bush-era tax cuts to new Medicare taxes for 2013. Changes to the Social Security tax that will raise payments for most of the working population next year are still flying under the radar.

A temporary reduction in Social Security payroll taxes is set to expire at the end of the year and its fate, along with dozens of other expiring tax provisions, will rest with the lame duck Congress after the November presidential election.

Taxes will increase 2 percent for about 163 million workers throughout the nation if the temporary rate is not extended. A worker who earns $100,000 per year will pay about $2,000 more in overall employment tax next year.

Gordon Meyer, tax director for Postlethwaite & Netterville in Metairie, La., said he hasn’t heard much discussion about the tax changes as the end of the year approaches. Employers will have to be ready to readjust the amount they withhold from paychecks in January, he said. Individuals should at least be aware of how the end of the reduction will affect them, he said.

“If you’re an employee, there is not a whole lot you can do except prepare for having a smaller paycheck come January,” Meyer said.

Social Security is funded with a 12.4 percent payroll tax on wages up to $110,100, which is shared by employers and employees. The Obama administration and Congress cut the portion employees pay from 6.2 percent to 4.2 percent for 2011 and extended the reduction into 2012. Unless it’s extended again, the employee rate will apply to wages up to $113,700 in 2013.

The temporary cut was made to stimulate the economy, in theory giving workers more money in their paychecks to spend or save. But tax analysts suspect the tax break was too small to be noticed in a single pay period.

Critics argue extending the cut will erode funding for Social Security, a program Congress is reimbursing. As the burden adds to the federal deficit, political support for the break has evaporated among Democrats and Republicans.

Ted Stacey, director of tax services for Bourgeois Bennett in Metairie, said the Internal Revenue Service and payroll services appear to be readying for the end of the tax break, planning that could cause disruptions if Congress approves a last-minute extension.

It can take payroll service companies several months to reconfigure software to withhold the correct amount from payroll and to reimburse employees money incorrectly withheld, Stacey said. He added that employers have a number of unrelated tax changes to factor in for 2013, including a new 0.9 percent Medicare tax on high-earners.

“It’s going to be a tough first quarter no matter how you look at it,” Stacey said.

Self-employed individuals, who pay the entire 12.6 percent tax, should be ready for the changes. They are required to estimate their taxes for the coming year and will need to calculate the impact accurately to avoid paying penalties. Meyer said many remove the guesswork by using a “safe harbor” provision to show they made a good faith effort to follow reporting requirements, Meyer said.

Self-employed individuals earning less than $150,000 per year can avoid penalties if they pay 100 percent of their tax bill from the previous year. The rate jumps to 110 percent for those earning more than $150,000 per year.

“Either way, self-employed people are going to pay more,” Meyer said. “But the question is: Are you using the safe harbor? If so, you don’t have to worry about adjusting your estimated tax payments.”

Mahlon Sanford, a partner with Carr, Riggs & Ingram in Metairie, said recent retirees might also want to consider the impact the end of the payroll tax reduction will have on their income. Many retirees receiving benefits have continued to work through the recession, and they will benefit from a 1.71 percent increase in Social Security benefits for 2013. But they will also be required to pay the additional 2 percent in overall employment taxes, “effectively funding their own increase,” Sanford said.

 


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