Payroll Tax Issues Remain in Limbo with Many Due to Sunset
By Josie Martinez, Senior Partner and Legal Counsel
With 2013 just weeks away, payroll professionals are getting extremely anxious about various favorable payroll tax provisions affecting individuals and businesses that have yet to be determined relating to 2013 withholdings. The provisions mentioned below may expire as of Jan. 1, 2013, unless Congress acts to extend them. Of great concern to many employers/payroll professionals (not to mention the employees that are affected by such provisions) are the following four issues:
1. Transportation/Commuting Benefit. Unless Congress decides differently in the very near future, the mass transit portion of the commuter benefit ($125 a month in 2012) will remain unconnected to the tax-free exclusion for qualified parking expenses of the commuter benefit ($240 a month in 2012). For 2011, Congress had included a provision that kept the mass transit portion of the commuter benefit equal to the parking tax benefit. Unfortunately, because Congress did not again extend the transit benefit before it expired at the end of 2011, the monthly maximum transit amount was reduced to $125 per month on Jan. 1, 2012. The issue of reinstating parity between the parking and transit benefits through the end of 2013 remains unresolved.
2. Social Security. The 2 percent payroll tax cut in effect in 2011 and 2012 temporarily reduced the Social Security withholding tax rate on wages earned by employees from 6.2 percent to 4.2 percent on the first $110,000 of wages. While this decrease is set to expire as of Jan. 1, 2013, an additional 0.9 percent Medicare payroll tax increase will also apply on employee wages in excess of $200,000 (an increase from 1.45 percent to 2.35 percent).
3. Educational Assistance. Through Dec. 31, 2012, employers were permitted to reimburse employees up to $5,250 on a tax-free basis for educational assistance (pursuant to Section 127 of the Internal Revenue Code). This benefit included reimbursement for higher education courses at the associate, undergraduate and graduate levels and for programs that allowed the employee to qualify for a new position. Should the provision — which Congress has extended repeatedly since its inception in 1978 — expire, educational reimbursements will be much more limited.
4. Adoption assistance. This year, employees were able to exclude from gross income up to $12,650 (paid or reimbursed by an employer) for qualifying adoption or attempted adoption expenses under the adoption assistance program. Qualified adoption expenses are those expenses that are reasonable and necessary adoption fees, including court costs, attorney fees, traveling expenses and other expenses directly related to the legal adoption of an eligible child. The income tax exclusion for amounts paid by an employer is also scheduled to expire on Dec. 31, 2012.
Given this tax uncertainty, employers must prepare for changing payroll taxes and have contingency plans in place. Keeping in mind that transparency is essential, employers should inform employees — particularly those directly affected by these benefits — of the uncertainty behind these provisions and the potential ramifications should these tax provisions not be extended beyond Jan. 1, 2013. As an employer, consider what changes are necessary should the tax status of these benefits change, in particular from a payroll perspective. An employee may still get the same benefit, however, the value may now be taxable. Even if tax extensions for education assistance, adoption assistance and the 2 percent payroll tax increase are adopted in a new tax bill, employers should note that it is highly unlikely that either the new limits on health care flexible spending accounts or the new 0.9 percent payroll tax increase for high-income employees will be altered or eliminated. The paramount question remains: Will Congress act in time?