Author: Rena Pirsos, XpertHR Legal Editor

The Social Security Administration (SSA) and the Internal Revenue Service (IRS) have announced the annual cost-of-living increases and inflation-adjusted amounts vital to employers in preparing payroll systems for year-end reporting and the upcoming tax year.

XpertHR has updated its Employment Law Manual content to incorporate this information.

SSA News

The SSA announced that the Social Security taxable wage base will be $113,700 for 2013, an increase of $3,600 from the 2012 wage base of $110,100. As in prior years, there is no limit on the amount of wages subject to Medicare tax withholding; all covered wages are subject to Medicare tax at 1.45%.

Assuming Congress does not extend the current employee Social Security tax rate of 4.2% by the end of 2012 and the rate reverts back to 6.2% for 2013, the total 2013 FICA tax rate, which is the Social Security tax rate of 6.2% plus the Medicare tax rate of 1.45%, will be 7.65% up to the $113,700 Social Security wage base.

In addition, the 2013 FICA coverage threshold for election workers will be $1,600, up from $1,500 in 2012, and the threshold for domestic workers will remain unchanged at $1,800.

IRS News

The IRS announced the tax year 2013 cost-of-living adjustments affecting dollar limitations on benefits and contributions under qualified retirement plans.

The following amounts have increased:

  • The limitation on the exclusion for elective deferrals for employees who participate in plans under Internal Revenue Code (IRC) §§ 401(k) and 403(b) is increased to $17,500 from $17,000.
  • The limit on annual additions to defined contribution plans under IRC § 415(c)(1)(A) is increased to $51,000 from $50,000.
  • The limitation on the annual benefit under a defined benefit plan under IRC § 415(b)(1)(A) is increased to $205,000 from $200,000.
  • The annual compensation limit for calculating contributions under IRC §§ 401(a)(17) and 404(I) increases to $255,000 from $250,000.
  • The dollar amount under IRC § 409(o)(1)C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period is increased to $1,035,000 from $1,015,000, while the dollar amount used to determine the lengthening of the five-year distribution period is increased to $205,000 from $200,000.
  • The annual compensation limitation under IRC § 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under § 401(a)(17) to be taken into account, is increased to $380,000 from $375,000.
  • The limitation under § 408(p)(2)(E) for elective deferrals to SIMPLE retirement accounts is increased to $12,000 from $11,500.
  • The limitation on deferrals under § 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased to $17,500 from $17,000.

The following amounts have been adjusted for inflation:

  • Foreign-earned income and housing cost exclusion. The 2013 maximum foreign-earned income exclusion amount under IRC § 911(b)(2)(D)(i) is $97,600, up from $95,100 in 2012. The maximum amount of the foreign housing cost exclusion is $13,644, up from $13,314 in 2012.
  • Medical Savings Accounts. For 2013, a high deductible health plan is a plan with an annual deductible of $2,150 - $3,200 for individual coverage (up from $$2,100 - $3,150 in 2012) and $4,300 - $6,450 for family coverage (up from $4,200 - $6,300 in 2012). Maximum out-of-pocket expenses cannot exceed $4,300 for individual coverage ($4,200 in 2012) and $7,850 for family coverage ($7,650 in 2012).
  • Long-term care health insurance benefits. For long-term care insurance contracts that make per diem benefit payments, the maximum amount of the payments that is excludable from income in 2013 is $320 per day ($310 per day in 2012).
  • Pipeline construction industry per diem option. In 2013, an eligible employer may pay certain welders and heavy equipment mechanics up to $17 per hour for rig-related expenses that will be deemed substantiated under an accountable plan ($16 in 2012), and up to $10 per hour for fuel (unchanged from 2012 amount), when paid in accordance with Rev. Proc. 2002-41, 2002-23 IRB 1098.

Additional Resources

Payroll > Withholding Taxes > FICA Tax Rates

Payroll > Taxation of Employee Compensation

Payroll > Taxation of Employee Benefits

Payroll > International Payroll Issues > Foreign Earned Income and Housing Cost Exclusions

Employee Benefits > Retirement Benefits

Employee Benefits > Health Care Benefits