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When you receive your initial paycheck for 2013 you had better take a close look to see what the payroll department has done with your pay. If you do not, you may be in for a big tax bite at the end of the year.
Background
For years the Social Security tax was set at 12.4% of your earnings. 6.2% of the obligation was paid by your employer. The other 6.2% was paid by you, the employee. The tax was applied to a maximum of $110,100 of 2012 earned income for each employee. Despite the long-standing discussion regarding the impending insolvency of Social Security, Washington passed a 2% tax cut for 2011 and 2012 on the employee portion of this tax (from 6.2% to 4.2%). This provision expires beginning January 1, 2013 unless Congress acts to extend the 2% tax cut.
What you should do
- Check your pay. Make sure that your Social Security withholding is returned to 6.2%. If it has not been done, notify your payroll department immediately.
- Note the pay drop. Understand the impact of the return to historic Social Security tax rates on your income. Adjust your household spending to plan for this drop in your take-home pay.
- While you're at it. While reviewing your initial 2013 pay stub for the Social Security adjustment, also review all your other withholdings. Many employers adjust other benefit costs at the beginning of each year. This includes retirement savings plans, employer retirement match programs, health insurance, dental insurance, and life/disability.
- Adjust your withholdings? Also check your state and federal withholdings to ensure they are accurate. If adjustments are required file a new W-4 with your employer.
- Self-employed too. The 2.0% re-set in Social Security rates also impacts self-employed individuals. Make sure you plan accordingly.
As a final note, please stay tuned. Our elected officials in Washington D.C. are full of surprises and may change Social Security tax rates once again.