Thursday, December 6, 2012


There is a great deal of concern in the tax community generally about unresolved tax issues, including the sunsetting tax provisions, extenders, and lack of an alternative minimum tax (AMT) patch. However, one group in particular—payroll professionals—has an especially pressing need for certain tax issues to be decided in order to compute 2013 withholding. This article details a number of these key issues.

Withholding tables. Income tax rates are scheduled to increase on Jan. 1, 2013, if Congress does not act before then to keep the rates at the current levels. It's unclear whether IRS will release the 2013 withholding tables without congressional action.

Backup withholding. The backup withholding rate will increase from 28% to 31% on Jan. 1, 2013, if Congress does not act to keep the income tax rates at current levels.

Payroll tax cut. The “payroll tax cut” has temporarily lowered the Social Security withholding tax rate on wages earned by employees in 2011 and 2012 from 6.2% to 4.2%. Currently, there is no legislation in Congress that would extend the payroll tax cut beyond Dec. 31, 2012, but there has been some recent talk in Washington about either extending the cut or providing some other payroll tax stimulus.

Commuting benefits. Without congressional action, the annual tax-free exclusion for the combined value of employer-provided transit passes and transportation in a commuter highway vehicle ($125 a month in 2012) will remain unconnected to the tax-free exclusion for qualified parking expenses ($240 a month in 2012).

Employer-provided educational assistance.Through Dec. 31, 2012, employers may provide up to $5,250 annually in educational assistance to an employee on a tax-free basis. This provision will expire on Jan. 1, 2013, without congressional action. If the provision does expire, education expenses will only be able to be excluded from an employee's income if the expenses qualify as a working condition fringe benefit.

Adoption assistance. In 2012, employees may exclude from gross income up to $12,650 paid or reimbursed by an employer for qualifying adoption expenses under an adoption assistance program. This fringe benefit will not be available in 2013 without congressional action.

koa observation: Until some of the issues above are resolved, it is unclear whether IRS will release the 2013 Circular E (IRS Publication 15), 2013 Form W-4, and 2013 Form 941.