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American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition

American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
It's more important than ever to be in compliance with payroll laws and regulations! How do you stay in compliance and avoid penalties? The APA Basic Guide to Payroll is written to make understanding the laws and regulations as easy as possible. And this single-volume guide is filled with tools to help you apply the law and make proper calculations – with ease!

CCH® PAYROLL — 10/24/12

2013 OASDI tax and earnings base is $113,700; COLA is 1.7%

Social Security beneficiaries will see only a minor 1.7% increase in their monthly checks in 2013. This cost-of-living adjustment, or COLA, will produce an estimated average monthly benefit of $1,261 for all retired workers in 2013, $21 a month more than in 2012. The COLA increase will be applied to this coming year's benefits, beginning with benefits for December 2012, which are payable in January 2013.

The amount of earnings subject to taxation under FICA and SECA, the "wage base," is also going up in 2013. The 2013 wage base of $113,700 is $3,600 higher than the 2012 amount of $110,100.

The benefit and wage base increases for 2013 were announced October 16 by the Social Security Administration in a press release.

Tax increase reflects increase in national average wages

The tax increase will show up in the FICA tax deducted from the paychecks of those individuals earning above the 2012 wage base of $110,100. Although the tax rate for the Old-Age, Survivors and Disability Insurance (OASDI) portion of the tax under the FICA has held steady at 6.2% since 1990, the amount of wages subject to tax increases each year based on increases in the national average wage.

The $113,700 earnings base for 2013, which applies only to the 6.2% OASDI portion of the Social Security tax, could result in a FICA tax increase of as much as $223.20 for employees (and their employers) whose earnings exceed the 2012 tax and earnings base of $110,100. Self-employed individuals may owe as much as $446.40 in additional self-employment (SECA) tax in 2013 since they also must pay the "employer" portion of the taxes. However, they can recoup some of this amount through a deduction on their federal income tax return. There is no limit on the amount of earnings subject to the 1.45% Medicare (hospital insurance) portion of the tax.

About 10 million workers out of a total of approximately 163 million workers who will pay Social Security taxes in 2013 are affected by the higher wage base for 2013, according to the SSA.

No change in tax rates

The employee/employer Social Security tax rate remains at 7.65% for 2013, including 6.2% for the OASDI portion and 1.45% for the hospital insurance portion. For the self-employed, the rate continues to be 15.3%. Note that self-employed persons calculate their net earnings as gross earnings reduced by 7.65%, and they deduct half of their Social Security taxes from their net earnings for federal income tax purposes.

Retired worker's average monthly benefit becomes $1,261

For Social Security beneficiaries, the average monthly benefit (prior to deduction for the Part B Medicare premium) for all retired workers will rise to $1,261, up from the average benefit of $1,240 paid one year earlier. The maximum Supplemental Security Income (SSI) monthly benefit for an individual will rise to $710, up from $698, and the maximum SSI payment to a couple will rise to $1,066, up from $1,048.

Domestic employee and election worker coverage

For 2013, there is no change in the amount of wages a domestic worker may earn without being subject to FICA taxes. An employer can pay a domestic worker, such as a maid or a nanny, up to $1,800 in 2013 without having to wrestle with federal withholding on wages. The threshold for election workers, however, increases by $100 in 2013, to $1,600.

Age 65 birthday celebrants in 2013 required to wait until 2014 for full benefits

Workers who attain age 65 in 2013 will have to wait until 2014 to retire if they wish to receive their full retirement benefit. A gradual rise in the full retirement age began in 2000 resulting from the 1983 amendments to the Social Security Act, which increased the full retirement age from age 65 to age 67. The only individuals attaining full retirement age in 2013 will be individuals attaining age 66, i.e., individuals born January 2, 1947, through January 1, 1948. For such individuals, the maximum possible monthly benefit is $2,533.

Full retirement age will remain at age 66 for the next eight years for individuals born January 2, 1943, through January 1, 1955.

Reduced benefits for early retirees and the ”break-even” age

Workers may retire as early as age 62, but they will receive a reduced benefit if they do. The full retirement age of 66, for those workers reaching age 62 in 2013, is also based on the 1983 amendments. The practical effect of this change is to slightly decrease the amount of early retirement benefits payable to individuals who reach age 62 in 2013 by increasing the reduction amount in the benefit formulas by 5/12 of 1.0% of an individual's primary insurance amount (PIA) for each additional month of retirement beyond 36 months. This process is explained more fully in the CCH Unemployment Insurance Reporter with Social Security and in the "Social Security: Benefits Explained" division. PIAs are explained in the same division.

Increases for other beneficiaries

For an aged couple, both receiving benefits, the average monthly Social Security benefit becomes $2,048 (up from the average benefit of $2,014 paid when last year's increase took effect in December 2012). For a widowed mother and two children, the average monthly benefit becomes $2,592 (up from $2,549). For an aged widow or widower living alone, the average monthly benefit becomes $1,214 (up from $1,194) and for a disabled worker with a spouse and one or more children, the average monthly benefit becomes $1,919 (up from $1,887). The average monthly benefit for all disabled workers becomes $1,132 (up from $1,113). All of these benefit amounts assume steady earnings since age 22 and no earnings prior to that point.

Benefit computation formula changes

The bend points used in the computations of the PIA for workers who first become eligible to receive a benefit in 2013, or who die in 2013 before becoming eligible, will be $791 and $4,768, respectively. The 2013 eligibility year PIA formula, which is based on the worker's average indexed monthly earnings (AIME) throughout his or her career, thus will be 90% of the first $791 of AIME, plus 32% of AME over $791 through $4,768, plus 15% of any AIME in excess of $4,768.

Maximum family benefit increases

The maximum family benefit in cases involving workers who first attain age 62, become disabled or die in 2013 will be computed as 150% of the first $1,011 of the worker's PIA, plus 272% of the worker's PIA over $1,011 through $1,459, plus 134% of the worker's PIA over $1,459 through $1,903, plus 175% of the PIA in excess of $1,903.

Official notice to appear in Federal Register

The Social Security Administration's official publication of the formula adjustments, cost-of-living increases, and tax and wage bases that will affect Social Security benefit computations in 2013 and its explanations of how the adjustments are calculated will appear in the Federal Register by the end of October.

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