I have received numerous phone calls and emails from foreign clients wondering how the legislation will affect their operations.
First a threshold comment on what the legislation is not! It is nowhere close to the so called “Grand Bargain” some had envisioned following the results of the November election. Rather it is a stop-gap measure to prevent the expiration of the Bush-era tax cuts from taking effect on middle class taxpayers. Congress will likely revisit tax policy and spending cuts in the process of addressing the nation’s debt limit.
You’re likely to get a flood of questions from your employees on the following provisions, specifically:
Increased tax rate: For those clients with employees based in the US the employee portion of Social Security taxes will be going back up to 6.2% from the 4.2% rate that was in effect for 2011 and 2012. While this does not affect the company it does have an impact on employees and will likely be the source of lots of questions once they receive their first paycheck in 2013. The rate affects wages up to the taxable wage limit of $113,700. To put the cost of the tax increase in perspective anyone who reaches the maximum tax limit in 2013 will pay a total Social Security tax of $7,049.40 versus a 2012 maximum of $4,624.20, which represents an increase of $2,425.00.
Additional Medicare tax: Taking effect at the same time (but unrelated to ATRA) is the 0.9% increase resulting from what is called the “Additional Medicare tax” — the result of the Patient Protection and Affordable Care Act which also goes into effect in 2013. The new tax applies to single individuals earning over $200,000 and married couples filing jointly who earn over $250,000 annually. Employers are required to withhold the additional tax from all wages in excess of $200,000 regardless of filing status of the employee. Thus the new Medicare tax rate on these taxpayers is increased from 1.45% to 2.35%. The employer Medicare tax remains unchanged at 1.45%. Note that there is no taxable wage limit on Medicare taxes.
Moving on to the business tax provisions in the law, the following changes should be noted:
- The ATRA extends permanently the Bush-era credit for employer-provided child care facilities and services.
- The law extends through 2013 the enhanced IRS Code Section 179 of expensing of new equipment purchases up to $500,000 depreciation.
- Bonus depreciation of 50% is also extended through 2013.
- The research tax credit is extended through 2013.
- The Work Opportunity Tax Credit is extended through 2013.
- The 15 year recovery period of depreciation for qualified leasehold/retail improvements was extended through 2013.
There are other provisions in the law that may affect your operations as well. Please contact us if you would like more information.