The Social Security Administration has announced that the 2013 taxable wage base for the Social Security portion of FICA increases to $113,700. That’s a 3.2% hike over the 2012 wage base of $110,100.
Except for pretax medical and tax-free fringe benefits, all wages are subject to the 1.45% Medicare portion of FICA, since there’s no wage base. Reminder: The Medicare tax rate is scheduled to increase 0.9%, to a maximum of 2.35%, when employees earn more than $200,000. (SSA Fact Sheet, 10-16-12)
2013 employee tax rate up in the air. The two-year decrease in the employee Social Security tax rate—to 4.2%, from 6.2%—is scheduled to expire at the end of this year. While there has been some talk recently of extending the 4.2% employee Social Security rate again, nothing’s certain at this time. If the rate were extended through 2013, the maximum Social Security tax employees would pay would be $4,775.40. If the rate reverted to 6.2%, the maximum Social Security tax employees would pay would be $7,049.40.
Exempt amounts for retirees. Social Security issues may play a role in plans you may have to entice former employees out of retirement. They’re an attractive source of skilled labor, since they already know the ropes. However, some may hesitate to rejoin the work force because they could lose some of their Social Security benefits. How much they’ll lose depends on an earnings test. Tip: Retirees usually think they’ll lose more benefits than they actually will, so informing them of the 2013 figures can ease their minds.
Retirees who return to work during the year they reach full retirement age—between 65 and 67, depending on when they were born—are subject to a modified earnings test that applies only to earnings for the months before that birthday. Wages earned after that birthday don’t reduce Social Security benefits. The exempt amount is $40,080 a year; $3,340 a month. For them, $1 in benefits is lost for every $3 they earn.
A separate earnings test applies to early retirees. Employees who retire before they reach full retirement age and who then return to work, can continue to earn up to $15,120 a year, or $1,260 a month, without losing benefits. For these retirees, $1 in benefits is lost for every $2 they earn.
2013 PENSION COLAS ARE NEXT: The IRS has yet to release the 2013 cost of living adjustments for pretax contributions into 401(k) plans, pretax catch-up contributions, and other inflation-adjusted pension amounts. Payroll Legal Alert will report these figures as soon as the IRS releases them.