As Congress and White House jockey over position as they try to balance on the fiscal cliff, payroll departments are wondering what payroll tax policy is going to designate come Jan 1, 2013. Of particular concern is the expiration of social security tax reductions and income tax rate increases that are scheduled for year end. Usually, by now, payroll tax rates would have been determined, IRS tables developed, payroll software updated and tested allowing for a smooth transition to the new year.

One thing is certain. Most employees will experience a tax increase if no agreement is reached and the “Bush tax cuts” are allowed to expire.

While many states have released income tax tables for the year 2013, the IRS is waiting for Congressional action before it releases its tables for 2013. If no agreement can be settled on between the White House and Congress by the end of the year, the treasury secretary can choose to keep at least some tax rates at current 2012 levels if there is a reasonable expectation an agreement can be reached to extend those rates into 2013.  He can choose to keep all rates the same or he can choose to just keep some, choosing to raise the rates on employees earning $200,000 or more. However some of the factors Treasury needs to take into account is if Congress is actually going to raise rates or are they going to increase revenue by reducing deductions.

If no no fiscal agreement is made by the end of the year and Treasury chooses not to intervene, then on Jan 1, 2013, all Bush tax cuts will expire and the 4 highest percentage federal tax rates would increase. The top tax rate will increase from 35 to 39.6%, 33 to 36%, 28 to 31% and 25 to 28%. The supplemental wage tax rate (such as a bonus payment), which is tied to the  lowest rate of the top four, would thus  increase from 25 to 28%. It should also be noted that the IRS’s backup withholding rate, the rate applicable to those taxpayers who have been identified by the IRS as those individuals who provided incorrect tax payer ID numbers, would increase from 28 to 31%.

Publication 15 for the year 2013, the publication all taxpayers and payroll depts rely on to determine payroll taxes,  will probably not be released until Congress has reached an agreement on taxes and spending. As a result, the IRS will probably also not issue a new form w-4 until Publication 15 has been finalized.

Likewise, if a fiscal agreement is not reached, the format for form 941 for 2013 will probably not be  determined until well into the first quarter of 2013 as decisions need to be reached regarding social security tax rates. The current employee social security tax of 4.2% is set to expire at the end of the year. While most experts think the this payroll tax reduction will not continue, the Obama administration has not yet indicated what their intentions are regarding this reduction and whether they plan to push for an continuation of the tax break. If it is not extended, form 941 will have to be redesigned to accommodate the revision.

One thing that is certain, and that the new form 941 will accommodate, is that those employees who earn more than $200,000 will be subject to a .9% Obamacare tax surcharge on that additional income above $200K.  While ObamaCare adds the .9% tax on salaries and wages that exceed $125,000 for single taxpayers and $250,000 for married taxpayers, the IRS regulation requires employers to withhold this additional tax when employee wages reach $200,000 regardless of the employees filing status.  While employers are not required to notify employees of this additional tax, it is suggested that Payroll depts. inform those  employees of this new tax so that it will not be a surprise when that surcharge kicks in. Taxpayers should note that investment income (interest, dividends, capital gains, etc.) may also be subject to new ObamaCare taxes depending on the level of that type income .