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

American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
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CCH® PAYROLL — 10/27/11

Social Security benefits to increase by 3.6% for 2012

For the first time in three years, Social Security beneficiaries will receive a cost-of-living adjustment in their benefits for 2012. The 3.6% increase will benefit the more than 60 million Americans who receive monthly Social Security and Supplemental Security Income (SSI) benefits. This follows two years of no increase due to a 2.1% decline in the Consumer Price Index (CPI) from the third quarter of 2008 to the third quarter of 2009, and the absence of an increase from the third quarter of 2009 to the third quarter of 2010 that “catches up” to where the CPI was at its high point in the third quarter of 2008. The increase from the third quarter of 2009 to the third quarter of 2010 was only 1.5%. However, an increase of 4.2% over the past year enabled the CPI to rise above its third quarter 2008 level. The prior two years have been the only years in which there has been no COLA increase since 1975, when Social Security benefits became indexed to increases in the Consumer Price Index.

The increase will begin for 55 million Social Security beneficiaries with the December 2011 benefit that is received in January 2012. Increased payments for 8 million SSI beneficiaries will begin on December 30, 2011.

Wage base

The lack of a COLA for 2010 and 2011 also meant that there was no increase in the amount of wages subject to taxation under FICA for wage earners and under SECA for the self-employed for the past two years. However, this wage-indexed parameter (the wage base) increases to $110,100 for 2012, and accounts for increases in national average wages since 2008, the last time the wage base was increased. A number of other program amounts also will increase for 2012 now that there is a COLA next year. Some of these program amounts are directly indexed to the cost of living, while others are annually adjusted based on the increase in the national average wage index, but only if there is also a cost-of-living increase for benefits that year.

National average wages did increase in 2010, the latest year for which data is available, rising to $41,673.83, following a year that saw a rare decline in national average wages. The amount for 2009 was $40,711.61, which was less than the previous high of $41,334.97 for 2008. What follows is a summary of program amounts that change based on changes in the COLA or in national average wages, listed according to the factor that drives the change.

Domestic employee and election worker coverage

For 2012 the amount of wages a domestic worker can earn without being subject to FICA taxes increases from $1,700 to $1,800. An employer therefore can pay a domestic worker, such as a maid or nanny, up to $1,800 in 2012 without having to wrestle with federal withholding on wages. The threshold amounts are based on a statutory formula that takes into account annual changes in national average wages.

There is no increase or decrease in the no-tax threshold for election workers for 2012 however. The amount of wages they can earn before being subject to FICA remains at $1,500.

Average benefit paid to go up for 2012

The average Social Security retirement benefit paid to all retired workers as of the end of September 2011 was $1,182.96 and it is expected to increase to $1,186 by the end of the year. The average retirement benefit awarded to new claimants for the same period was $1,187.99. All of these beneficiaries can expect to see an average $43 monthly increase, beginning with benefits paid for December 2011 and received in January 2012. The new average benefit of $1,229 is significantly higher than the average benefit of $1,175 for December 2010 that was payable in January 2011.

Impact on Part B premiums

Although there was no increase in the Part B Medicare premium for most beneficiaries for the past two years due to a “hold harmless” provision in the Act (Act §1839(f), 42 U.S.C. §1395r) that blocks premium increases when benefits do not rise, these beneficiaries will see a significant increase in premium costs for 2012. However, as we go to press, the specific amounts have not yet been announced.

Huge tax increase for 2012?

The amount of earnings subject to taxation under FICA and SECA, “the wage base,” increases from $106,800 for 2011 to $110,100 for 2012. Under Act 230(a), the wage base, which is indexed to increases in national average wages and not to the consumer price index, can be increased only if there also has been a benefit increase due to a cost-of-living adjustment. For this reason, there was no increase in the wage base for the past two years. Absent that restriction, the wage base would have risen in 2010 and remained the same for 2011 because of the 2009 decline in national average wages. The Social Security Act does not allow the wage base to go down from one year to the next.

The benefit and wage base amounts for 2012 were announced October 19 by the Social Security Administration in a press release.

As a result of this increase, as well as a result of the expected expiration of the “2011 tax holiday,” which gave employees a two percentage point reduction in the amount of tax paid under FICA and SECA, taxes could increase by as much as $2,340.60 for some individuals in 2012. The employee 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, but was temporarily reduced to 4.2% for 2011.

A recent attempt to reduce the employee tax even further, to 3.1% (The American Jobs Act of 2011, S. 1660), failed a test vote on October 11. Employers also would have benefited under the measure up to certain payroll limits. Although this separate provision is likely to be resubmitted for a vote, its passage remains in question due to opposition to offsetting revenue risers.

If there is no extension of the tax holiday, the employee/employer Social Security tax rate will return to 7.65% for 2012, including 6.2% for the OASDI portion and 1.45% for the hospital insurance portion. For the self-employed, the rate will return to 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.

The $110,100 earnings base for 2012 applies only to the 6.2% OASDI portion of the Social Security tax. There is no limit on the amount of earnings subject to the 1.45% Medicare (hospital insurance) portion of the tax.

The wage base is also a benefits base, and is the maximum amount of earnings that can be counted for benefit purposes.

National average wages increase moderately

The 2012 wage base reflects national average wages for 2010 and is 2.4% higher than national average wages for 2009, the first year since the Social Security Administration began tracking national average wages in 1951. The index for 2009, $40,711.61, was 1.5% lower than the index for 2008, $41,334.97.

Retired worker's average monthly benefit is $1,229

For Social Security beneficiaries, the average monthly benefit (prior to deduction for the Part B Medicare premium) for all retired workers will be $1,229 in 2012, significantly higher than the average benefit of $1,175 paid in December 2010.

Age 65 birthday celebrants in 2012 are required to wait until 2013 for full benefits

Workers who attain age 65 in 2012 will have to wait until 2013 to retire if they wish to receive their full retirement benefit. A gradual rise in the full retirement age began in 2000 as a result of the 1983 amendments to the Social Security Act, which increased the full retirement age from 65 to 67. Workers attaining full retirement age in 2012 will be individuals attaining age 66, i.e., individuals born from January 2, 1946, through January 1, 1947. The maximum monthly benefit payable to a worker retiring at full retirement age in 2012 will be $2,513.

If someone born in 1947 waits until they reach their full retirement age of 66 in 2013, their maximum benefit will be much higher, and its calculation would take into account 2012 earnings up to the maximum wage base of $110,100 plus the 2013 COLA, which will be announced in October 2012. Full retirement age will remain at 66 for the next four years for individuals attaining age 62 through 2016, i.e., individuals born no later than 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. In 2012, workers whose birth date is January 2, 1950, through January 1, 1951, inclusive, will not be entitled to a full retirement benefit unless they delay retirement until age 66. Their retirement benefit will be higher at that time, but workers with average lifetime earnings will have to live until their mid- to late-seventies to recover the benefits they lost by waiting until full retirement age.

The full retirement age of 66 for workers reaching age 62 in 2012 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 2012 by increasing the reduction amount in the benefit formulas by 5/12 of 1.0% of an individual's 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 at 12,305 in the “Social Security: Benefits Explained” division. PIAs are explained at 12,210 and 12,211 in the same division.

Average payment increases for other beneficiaries

The average payment for all beneficiary categories has increased slightly since December 2010, based on the natural increase in the indexed cumulative earnings (upon which benefits are based) for the most recently retired workers. For example, for a retired worker, the average monthly benefit at the end of September 2011 was $1,183 (up from $1,175 in December 2010). The average monthly benefit for all disabled workers at the end of September 2011 was $1,070, just two dollars more than the average for December 2010.

The 3.6% increase will raise the average monthly benefit for a retired worker and aged spouse by $69 to $1,994. The average increase for a widowed mother with two children will be $88, increasing the average monthly benefit to $2,543.

Benefit computation formula changes

The 2.36% increase in the national average wage index used in the wage indexing formula will change the “bend point” parameters used in the PIA calculations from which the actual monthly benefit amount is ultimately determined. The bend points used in the computations of the PIA for workers who first become eligible to receive a benefit in 2012, or who die in 2012 before becoming eligible, will be $767 and $4,624, respectively.

The 2012 eligibility year PIA formula, which is based on a worker's average indexed monthly earnings (AIME) throughout his or her career, thus will be 90% of the first $767 of AIME, plus 32% of AIME over $767 through $4,624, plus 15% of any AIME in excess of $4,624.

Maximum family benefit increases

The maximum family benefit in cases involving workers who first attain age 62, become disabled or die in 2012 will be computed as 150% of the first $980 of the worker's PIA, plus 272% of the worker's PIA over $980 through $1,415, plus 134% of the worker's PIA over $1,415 through $1,845, plus 175% of the PIA in excess of $1,845.

Disability thresholds

Substantial gainful activity: The amount of monthly earnings in 2012 that will give rise to a presumption that a disability beneficiary is no longer disabled, that is, the amount that is deemed sufficient to demonstrate an ability to engage in ”substantial gainful activity” increases by $10 to $1,010. A higher threshold of $1,690 will apply to blind beneficiaries in 2012, an increase of $50 over the amounts for 2009 through 2011.

Trial work: Disability beneficiaries may work for as many as nine months during any 60-month period without affecting their right to receive benefits. This is known as “trial work”. In 2012, a disabled beneficiary who works will not be treated as having engaged in trial work for any month in which his or her earnings are no more than $720, the same as in 2010 and 2011.

Retirement test amounts remain unchanged

The amounts that Social Security beneficiaries can earn without having their retirement benefits reduced will increase for 2012.

Although the Senior Citizens' Freedom to Work Act of 2000 eliminated the annual earnings test as of January 2000 for workers between full retirement age (age 66 in 2012 for workers who attained age 65 in 2011) and age 69, workers under the full retirement age of 66 who are receiving benefits remain subject to the test and can earn up to $14,640 in 2012, or $1,220 per month, without having their benefits reduced. One dollar in benefits is withheld for every $2 in earnings above the limit.

A modified test applies to a worker in the year that he or she reaches full retirement age. Thus, workers who reach age 66 in 2012 may earn up to $38,880 in the months preceding the attainment of full retirement age without having their benefits reduced. One dollar in benefits is withheld for every $3 in earnings above the limit. Once an individual reaches full retirement age, benefits are no longer subject to any retirement test. Beneficiaries age 70 and older have not been subject to benefit reductions based on earnings since 1983.

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 2012 and its explanations of how the adjustments are calculated will appear in the Federal Register by the end of October.

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