For all of 2011 and 2012, employees have enjoyed larger paychecks due to the 2% reduction in Social Security Tax. Self employed individuals also pay into the Social Security Fund through Self Employment tax. This tax has also been 2% lower for the past 2 years. This “payroll tax cut” will expire at the end of 2012 and your tax burden will once again be 7.65% of your wages and 15.3% of your self employment income. The social security wage base for 2013 is $113,700 so less taxpayers will max out the social security portion of the tax.
The Health Care Act provides that an additional Medicare Contribution Tax equal to .9% of your wages will be imposed on those whose earnings exceed a threshold ($250,000 if you are married and $200,000 if you are single). If you are self employed you also are subject to the .9% tax on your net self employment income in excess of $250,000 (Married filing Joint) or $200,000 (Single).
Employers will be responsible to withhold this additional Medicare tax, however, income thresholds for the new tax vary based on your filing status and employers will not be aware of your spouse’s earnings. For example if a couple both work and one spouse earns $150,000 and the other spouse also earns $150,000, then they are subject to the new Medicare Contribution Tax on the income in excess of $250,000 but the employer will likely not withhold the additional tax. If an employer fails to withhold the .9% tax, employees are still responsible for paying the tax. Taxpayers can pay this through estimated tax payments or when they file their returns in April.
The Health Care Act also imposes a tax on Unearned Income beginning in 2013. Unearned income consists of interest, dividends, annuities, royalties and rents, net capital gains and income derived from passive activities. Net Investment Income does not include income from active trade or business. The tax will be 3.8% of the lessor of the Net Investment Income or the Modified Adjusted Gross Income in excess of the thresholds. The thresholds are the same as above, $250,000 (married) and $200,000 (single).
As you work on your tax planning for 2012, you should consider accelerating income into 2012 if you expect you could exceed the $250,000/$200,000 threshold in 2013. Other tax strategies include maximize your 401K and/or other retirement plan contributions to bring your income below the threshold levels. It is important that you understand these new taxes and review all your options to reduce or avoid these taxes.