Finance and Accounting Services and Human Resources are providing this information to inform employees of payroll withholding changes and an increase in the mileage reimbursement rate. The Federal Withholding Tax tables substantially changed for Included in the changes is a decrease in the Social Security withholding rate from 6.
This decrease is a result of a federal tax bill that was passed in late December. A few highlights of the tax changes and how they may impact the Wake Forest community are as follows:.
The tax max did not increase between and , as there was no cost-of-living adjustment COLA for recipients. However, the nominal values do not account for inflation. Inflating the nominal tax max values between and 8 to dollars using the Consumer Price Index for Urban Wage Earners and Clerical Workers CPI-W shows that the real value of the tax max fell in the early years of the program, before climbing intermittently during the late s and s to again attain approximately the real value seen in the program's first several years.
Indexing the tax max to wage growth from onward has caused its real value to grow since then, as wages have generally increased more quickly than inflation. The third approach is to adjust the tax max values for wage growth. This measure is especially significant because the tax max applies to wages, and has been indexed to wage growth since Wage-adjusted tax max values fell in the earlier years of the program before rising in the s and early s.
The proportion of above-max earners in a given year has fluctuated since Social Security began in There were sizable changes in the percentage of covered workers with above-max earnings in the early years of the program, followed by a long period of relative stability Chart 2. The proportion started below 5 percent in the late s, rose to a high of 36 percent in , then fell back to about 6 percent by , where it has remained since, reflecting the consistent tax max indexing procedure used since the amendments were fully phased in.
Chart 2 shows the annual percentage of workers with earnings over the tax max; however, the percentage of workers who earn over the tax max at least once during their lifetime is higher, as some workers exceed the max in some years and not in others. Using microsimulation data from the Social Security Administration's Modeling Income in the Near Term MINT model, we project that from roughly the — birth cohort to the — birth cohort, between 20 percent and 25 percent of individuals will earn above the tax max at some point during their working careers Chart 3.
Current policy discussions often focus on targeting the tax max to cover a specific share of economy-wide earnings, such as 90 percent of covered wages Ball Since that time, the ratio has fallen.
This trend may seem counterintuitive given that, as discussed above, the percentage of covered workers with earnings over this level has remained roughly constant. The reason the share of covered wages subject to the tax max has declined is that wages above the tax max generally have grown more quickly than wages overall. Although some suggest targeting the tax max to 90 percent of covered wages, others have argued that if historical precedent matters, looking at the program only after is insufficient for example, Biggs b and Tanner The average percentage of covered earnings subject to the tax max throughout Social Security's history is 83 percent, lower than the most recent annual estimate 86 percent in Chart 4 shows the ratios for — , with the historical average highlighted.
To delve further into the trend in earnings distributions discussed above, we analyze the relationship between above-max earnings and below-max earnings using a tax-max ratio, defined as the percentage of earnings above the tax max divided by the percentage of workers who earn above the tax max.
This ratio illustrates whether the earnings over the taxable maximum among above-max earners are higher value greater than 1 or lower value less than 1 than the average of overall wages for that year. The degree to which the ratio is above or below 1 illustrates the level of earnings inequality between above-max and below-max earners. Chart 5 shows the tax-max ratio for — The lowest ratio was around 0. Thus, relative to other periods, the earnings of above-max workers were not so different from those of workers who earned less than the tax max.
By , when 90 percent of earnings were under the tax max and about 6 percent of workers earned more than the tax max, the ratio had risen to 1. By then, the tax max was indexed to wage growth and only very high earners exceeded the tax max. The ratio has steadily risen since , even as the proportion of above-max workers has stayed constant at about 6 percent.
Recently-hired employees are employees beginning work after January 1, , who will not receive a salary for all of the pay periods in the year. If the employee will receive his or her first paycheck prior to August 1, , you must use the old withholding calculation rules until July 31, On August 1, , use the revised withholding calculation rules with a modification to Step 2 determine the number of pay periods in the year. In this step, you must use the number of pay periods for that particular employee, calculated from the date of hire through December 31, , or earlier, if applicable.
If the recently-hired employee will receive his or her first paycheck on or after August 1, , use the revised withholding calculation rules. Follow Steps 1 through 12, skip Step 13, and modify Step 14 to use the number of pay periods in the entire year Step 2.
In other words, divide the result from Step 12 by Step 2. Caution: You may not use the revised withholding tables the withholding tables containing the pre-calculated total amount to withhold per pay period for recently-hired employees. Using the revised withholding tables for recently-hired employees will result in overwithholding.
Does the withholding rate for athletes and entertainers remain at 6. May I instruct my employees to provide me with a new Form CT -W4 in lieu of implementing the revised withholding rules? The newly enacted legislation requires you to use the revised withholding calculation rules or revised withholding tables posted on the DRS website to calculate the additional amount of withholding for employees affected by the rates.
However, you may inform your employee that he or she has a right to request a reduced amount of withholding or an increased amount of withholding by providing you with a new Form CT-W4. Are employers required to take into consideration tax withholding for other states when calculating catch-up withholding?
Employers withholding from wages paid to resident employees should refer to Conn. Employers withholding from wages paid to nonresident employees who perform services partly within and partly without Connecticut should refer to Conn.
Are employers required to take into consideration changes to filing status during the year? Only persons who had earned income and a Social Security number, could not be claimed as a dependent on another taxpayer's return, and did not qualify as non-resident aliens were eligible for the credit.
The credit was subject to two significant limitations. First, it was reduced by the amount of any economic recovery payment or refundable credit received by an eligible taxpayer as a result of ARRA. Failure to reduce the MWPTC by the amount of any such payment or credit is considered a mathematical or clerical error on an individual's tax return, allowing the IRS to assess an additional tax without going through the otherwise required deficiency procedures.
Unlike the individual recovery rebates established by the Economic Stimulus Act of P. This approach arguably reflects the views of Richard Thaler, a pioneer in the field of behavioral economics, on mental accounting and the findings of laboratory experiments that have been done to test some of the predictions based on his theoretical framework. In making this argument, they were hoping to avoid a repeat of what happened with the tax rebates: many recipients saved most or all of their rebates or used them to pay down debt.
Under the design for the MWPTC, the only recipients who have had to wait until they file their returns for and to claim the credit are lower-income individuals who have little or no tax liability, and thus were unaffected by the lower withholding amounts. The incremental benefit of the credit can be seen by comparing the tax withholding amounts set for the calendar year before and after the passage of ARRA. The increase in take-home pay was smaller for each payroll period in , because the disbursement of the credit took place over the entire year, instead of the final eight months of the year, as was the case with the MWPTC in Reduced withholding in and affected more than wage income.
Pension payments were also subject to the revised tables. Consequently, less federal income tax was withheld over that period from pension payments to federal and non-federal retirees, unless pension plan administrators or retirees made an adjustment to their federal tax withholding. In May , the IRS released an optional procedure for additional withholding on payments by plan administrators; the adjusted tables were intended to offset the reduced withholding from the MWPTC that year.
All other things being equal, retirees who had no wage income and whose pension payments were subject to the reduced withholding tables had more disposable income in and At the same time, because they were not eligible for the MWPTC, their tax liabilities for those years are larger than they would have been under the adjusted withholding tables.
Under the Federal Insurance Contributions Act FICA , an employer has to withhold Social Security and Medicare hospital insurance taxes from wages paid to employees and to match the employees' contributions. For , employees and employers were subject to a payroll tax rate of 7. There is no cap on the wage income subject to the Medicare tax.
See IRC Sections , , and a. Self-employed individuals must also contribute to both insurance trust funds, but at a rate that is double the rate that applies separately to employees and employers.
Under the Self-Employment Contributions Act SECA , self-employment income, which is defined as net earnings from self-employment, was subject to a tax of The same rules about annual wage caps apply to each tax. See IRC Sections and Section of the act lowers the employee's portion of the Social Security tax by two percentage points, from 6.
The act also reduces the Social Security portion of the self-employment tax from There are no changes in the employer's portion of the payroll tax or the Medicare tax rate for employees and self-employed individuals. In the case of the self-employment tax, the OASDI rate reduction does not affect the deduction for self-employment income in calculating net earnings from self-employment in the tax year. As a result, the deduction remains equal to 7.
Federal, state, and local government employees who are ineligible for Social Security benefits under their pension plans receive no benefit from the payroll tax holiday. Money from the general fund of the U. Treasury is being transferred to the OASDI fund to compensate for the loss of revenue from the payroll tax holiday. Employers have until March 31 to correct any excess OASDI tax withholding that occurred before the lower tax rate was implemented.
Unlike the credit, however, the payroll tax holiday has immediate benefits for workers at the bottom of the wage scale, since the first dollar of annual wages is subject to the payroll tax but exempt from the income tax.
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