New Year Payroll Angst: Preparing For Changes In Tax Rates

For human resources employees and payroll administrators, the time leading up to the end of the year is particularly busy. And this year may be particularly troublesome for the people who pay employees. On Jan. 1, 2012, the rate of taxation for Medicare and Social Security contributions changed. To be fully prepared for these changes, HR reps and payroll administrators should familiarize themselves with the changes and develop plans to ensure that the transition goes smoothly. The Medicare taxation rates will primarily affect individuals and joint-filing couples in certain higher income brackets and employees who earn certain non-cash taxable incomes, while Social Security contributions will increase for all employees, with the expiration of The Tax Relief, Unemployment Insurance Re-authorization, and Job Creation Act of 2010.

A broken system?

The unfortunate truth is that the current financial state of Medicare is in need of some serious reform – although opinions differ about what changes need to be made. The main problem lies with the fact that the pay-in and pay-out to Medicare is quite lopsided. According to Urban Institute, individuals and couples who earn average wages throughout their lives can expect to receive about $3 of Medicare benefits for every $1 they contributed. Without any financial expertise, it is easy to see that this is a model that cannot be sustained. Because of the issues plaguing Medicare funding, the unfunded liabilities for Medicare are now $105 trillion and rising.

Medicare tax increases

The government has put into place some Medicare payroll tax increases to raise more funds to support those on Medicare. These payroll taxes changes will affect people in higher income brackets. Following is a summary of key changes:

-Individuals making more than $200,000 a year will pay somewhat higher payroll taxes, depending on their tax bracket.

-Couples earning a combined income of more than $250,000 a year will also pay increased payroll taxes.

-Current tax rates in 2012 are at 1.45 percent for employees and employers alike. Starting in 2013, individuals who make over $200,000 and couples who earn over $250,000 a year will see an increase of .9 percent for a total of 2.35 percent. The employer rate will remain at 1.45 percent.

-Self-employed individuals that make over $200,000 a year will be subject to the new 2.35 percent Medicare tax rate.

Other changes

In addition to payroll tax changes, tax options will also be affected by the new policy. For example, in 2013, a new Medicare tax of 3.8 percent will be applied to all capital gains. And before Jan. 1, executives who receive stock as part of their total compensation may ask for a Section 83(b) Election, whereby they would pay tax immediately on their stocks, but potentially pay a much lower amount than when the stock eventually vests at a higher tax rate.

Preparation is key

For HR and payroll personal, changes in taxation rates, exemption and withholding can cause a lot of anxiety. The key to handling these changes with ease is preparing in advance. And to ensure a seamless transition, one of the best approaches is to hire a company with specialized knowledge of payroll issues