Guidance on the 2013 Tax Withholding Rates

I have talked to many of you and found that we all are working under different guidance for implementing the new IRS tax rates.  I have prepared a synopsis right from the IRS web site.

This is a synopsis of IRS Publication 1036 (dated January 2013).  Go to irs.gov and search for Publication 1036-January 2013.

The Internal Revenue Service (IRS) under Publication 1036 published December 31, 2012, has listed the following instructions for tax withholding rates for 2013.  The IRS will post further updates under a revised Publication as soon as it is available.  FRS Equity Strategies will only list here what affects equity compensation transactions.

You should work with your payroll dept to ensure that these rates are in place before you process W-2 income and withholding amounts from transactions.  But, don't fret, the IRS has allowances to do a catch-up for under- or over-withholding into February.

Also, work with your Payroll Dept to implement the dual wage base that now applies to Medicare withholding.  Check item #2 below.  To comply with the new "Additional Medicare Tax", the Stock Plans Dept must implement a dual Medicare rate that should follow the same process that you use for the dual Fed income tax withholding -the process for income under and over the $1M mark.  

Social Security tax

a.     For the employee the rate is now at 6.2% (up from 4.2%).

b.    The new wage base is $113,700.

c.     Social Security employer tax rate is unchanged at 6.2%.

d.    This tax rate must be implemented no later than Feb. 15, 2013, and all prior activity since Jan 1, 2013 must have a subsequent catch-up for any underwithholding.

Medicare Tax

a.     For the employee, the rate is 1.45%, unchanged from 2012.

b.    Additional Medicare Tax of 0.9% must be withheld for wages paid to an employee in excess of $200,000.

Federal Income Tax Rate

In the absence of the IRS written guidance, law and audit firms are recommending the following:

a.    The IRS has not made changes to the Federal supplemental tax withholding rate that has been 25%. This rate remains the same for low and middle wage-earners.

b.    Any income earned over the $1M mark, should be taxed at 39.6% (it was at 35%). This was the rate that was recommended during the fiscal cliff talks for high wage-earners. 

c.    Again, the IRS is still to publish the withholding rates for supplemental income. 

More announcements will be forthcoming.  Check the IRS web site at www.irs.gov to check on further developments.

Marianne Brannock-Hill, CTP CEP