IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts

Washington, D.C. (January 1, 2013)
By Michael Cohn

The Internal Revenue Service released new income tax withholding tables for 2013 late Monday to reflect the expiration of the 2001 and 2003 Bush tax cuts and the more recent payroll tax cuts of 2011 and 2012, but noted that the guidance would be modified if Congress acts.

The Senate passed legislation in the early hours of Tuesday morning on New Year’s Day to extend income tax cuts for single taxpayers earning under $400,000 a year and married couples under $450,000 a year (see Senate Approves Post-Midnight Fiscal Cliff Deal, Shifting Pressure to Boehner). Under the deal approved by the Senate, the top rate for income above those levels would rise to 39.6 percent, up from 35 percent.

However, the temporary payroll tax cut on Social Security withholding taxes of 2 percentage points was not part of the deal. The House is expected to take up the bill on Tuesday.

In issuing the guidance, the IRS said it takes note of the fact that Congress is currently considering legislation that could affect these rates. If the legislation is enacted, IRS will issue new, corresponding tables at that time.

The updated tables issued late Monday show the new rates for 2013, which reflect the expiration of the 2001 and 2003 tax cuts. In addition, employers should also begin withholding Social Security tax at the rate of 6.2 percent of wages paid following the expiration of the temporary two-percentage-point payroll tax cut in effect for 2011 and 2012.

Notice 1036, released Monday, contains the percentage method income-tax withholding tables and related information that employers need to implement these changes.

Employers should start using the new withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2013, but not later than Feb. 15, 2013, the IRS advised. For any Social Security tax under-withheld before that date, employers should make the appropriate adjustment in workers’ pay as soon as possible, but not later than March 31, 2013.

Employers and payroll companies will handle the withholding changes, so workers typically won’t need to take any additional action, such as filling out a new W-4 withholding form.

However, the IRS is urging workers to review their withholding every year and, if necessary, fill out a new W-4 and give it to their employer. For example, individuals and couples with multiple jobs, people who are having children, getting married, getting divorced or buying a home, and those who typically wind up with a balance due or large refund at the end of the year may want to consider submitting revised W-4 forms.

With the new guidance, the employee tax rate for Social Security reverts to its 2010 level of 6.2 percent. In 2011 and 2012, as a result of the payroll tax cuts, the employee tax rate for Social Security was 4.2 percent. The employer tax rate for Social Security remains unchanged at 6.2 percent. The Social Security wage base limit is $113,700. The Medicare tax rate is 1.45 percent each for the employee and employer, unchanged from 2012. There is no wage base limit for Medicare tax.

Employers should implement the 6.2 percent employee Social Security tax rate as soon as possible, the IRS advised, but not later than Feb. 15, 2013. After implementing the new 6.2 percent rate, employers should make an adjustment in a subsequent pay period to correct any underwithholding of Social Security tax as soon as possible, but not later than March 31, 2013.

For the latest information about developments related to Notice 1036, such as legislation enacted after it was published, visit www.irs.gov/notice1036.

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