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January 8, 2013

Payroll tax changes effective Jan. 1, 2013

The national legislation passed in the early hours of New Year's Day changed tax regulations and thus affected employees' personal income taxes and paychecks. Changes include general income tax rates and Social Security and Medicare tax rates and withholding rates. 

The first change affects all employees equally. The 2 percent temporary Social Security payroll tax reduction that was in effect for calendar years 2011 and 2012 was not extended. Therefore, the 2013 Social Security tax rate will revert back to the historical level of 6.2 percent. This will mean that all employees will see 2 percent less take-home pay starting with their January paychecks. The new tax rate will affect biweekly employees' Jan. 9 paychecks and monthly employees' Jan. 31 paychecks.

The second change affects all employees, but the effect will vary depending on each employee's personal situation. The legislation extended income tax cuts for single taxpayers earning under $400,000 a year and married couples under $450,000 a year. Employees with income above those levels will be affected by the top tax rate rising to 39.6 percent, up from 35 percent.

The third change affects employees with higher compensation and has two parts. Social Security taxes now will be assessed against wages up to $113,700, a change from the 2012 wage ceiling of $110,100.

In addition, although the overall Medicare tax rate remained unchanged, a new additional Medicare tax of 0.9 percent goes into effect in 2013. This additional tax applies to an employee's wages in excess of $200,000 in a calendar year. The additional Medicare tax withholding will begin in the pay period in which the employee's wages exceed $200,000 and continue until the end of the calendar year.

Purdue has incorporated the withholding changes into the payroll system so most employees will not need to take any additional action. However, Purdue urges employees to review their withholding every year and, if necessary, fill out and submit a new W-4, the form used to designate federal income tax withholding choices. 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.

Due to the lateness of the recent tax legislation, the 2013 W-4 form has not been updated with the new tax tables. Therefore, W-4 forms for 2013 are not yet available from the Internal Revenue Service (IRS).  

Until the 2013 forms are available, the IRS recommends using the 2012 form. It is necessary to cross out "2012" and write "2013" on the form for it to be valid.  

New forms are anticipated in mid-January. A communication will be forthcoming when they are available.

Additionally, Purdue encouraged employees to redirect the temporary Social Security payroll tax reduction, now ended, to their savings or retirement plans in 2010. Employees who did so may want to modify these allocations.

Questions may be directed to the Tax Department at Tax@purdue.edu.