Instead of a raise, some employees may see their take-home pay shrink in 2013 due to higher Social Security and Medicare taxes.

The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $113,700 from $110,100 as of January 2013, the U.S. Social Security Administration (SSA) announced on October 16, 2012.

Social Security and Medicare payroll withholding are collected together as the Federal Insurance Contributions Act (FICA) tax.

By January 1, U.S. employers should adjust their payroll systems to account for the higher taxable maximum under the Social Security portion of FICA, and notify affected employees that more of their paychecks will be subject to FICA.

Of the estimated 163 million workers who will pay Social Security FICA taxes in 2013, nearly 10 million will pay higher taxes as a result of the increase in the taxable maximum, according to the SSA, which has published FAQs about these changes.

The inflation-based increase in wages subject to Social Security withholding is separate from the scheduled expiration of the temporary 2-percentage-point cut of the federal Social Security tax that was part of an economic and jobs package enacted at the end of 2010 and subsequently extended through the end of 2012.

In 2013, with the higher income ceiling and (absent congressional action) the return to the 6.2 percent withholding rate, the maximum yearly Social Security tax withholding will rise from $4,624.20 (4.2 percent on income up to $110,100) to $7,049.40 (6.2 percent on income up to $113,700).

As a result, even employees who receive salary increases for 2013 may see the size of their paychecks shrink next year, especially if their pay raise is less than 2 percent. Notifying employees that FICA taxes are increasing for 2013 (barring congressional action prior to the start of the year) and highlighting the value of the employer-provided benefits package can help stave off falling morale.

Unlike Social Security, the amount of compensation subject to the 1.45 percent Medicare FICA tax is uncapped. However, in 2013, the Medicare tax rate will rise to 2.35 percent for single taxpayers with annual income of more than $200,000 and for married joint filers whose combined annual income exceeds $250,000, under a provision of the Patient Protection and Affordable Care Act.

Medicare Premium Hike May Offset Benefit Increase
In addition, the SSA announced that monthly Social Security and Supplemental Security Income (SSI) benefits paid to nearly 62 million Americans will increase by 1.7 percent in 2013.

The 1.7 percent cost-of-living adjustment (COLA) will begin with benefits that more than 56 million Social Security beneficiaries, and more than 8 million SSI beneficiaries, receive in January 2013.

For many beneficiaries, however, their Social Security increase will be partially or completely offset by increases in Medicare Part B premiums, which typically are deducted from Social Security benefits. Medicare Part B premium costs for 2013 were to be subsequently announced, but estimates, including the 2012 Medicare board of trustees' annual report, indicate an increase is on the horizon.

"This reflects the growing trend of health-related expenses eating into retirement income," said Cathy Weatherford, president and CEO of the not-for-profit Insured Retirement Institute, in a media statement. She advised those currently employed to develop a retirement plan that includes a strategy to cover basic living expenses as well as medical expenditures.

Information about Medicare changes for 2013, when announced, will be available at www.Medicare.gov.


Hedley Lawson, Contributing Editor
Managing Partner
Aligned Growth Partners, LLC
707-217-0979
hlawson@alignedgrowth.com
www.alignedgrowth.com