Changes To Social Security That Will Affect Your Workers

By: Jennifer Leahy
January 5th, 2012

Your interaction with the department of Social Security most likely involves the collection of payroll taxes. Beginning this month, there are several significant changes that will impact both you and your employees.

As of January 1, 2012, the maximum amount of earnings subject to the Social Security tax (taxable maximum) increases to $110,100, up from $106,800 in 2011. Employers must collect and submit Social Security taxes on wages up to $110,100.

There has been no change to the Medicare portion of the Federal Insurance Contributions Act (FICA).

Absent the passage of new legislation, the Social Security tax rate employees pay will return to the 6.2 percent share as it was prior to 2011, when the rate that employees pay was cut to 4.2 percent. The employer match rate remained unchanged.

The American Jobs Act proposed by President Obama and currently under consideration by Congress will further impact employer withholding in several ways. If it is passed, employers could experience:

• A decrease in payroll tax. The existing plan will cut the taxes paid by businesses on the first $5 million in payroll in half to 3.1 percent for 2012 only.
• A payroll tax holiday for businesses that increase payroll by hiring new workers or increasing existing worker wages. Businesses that do increase payroll can forgo payroll taxes for the first $50 million in payroll increases under the proposal.

One significant benefit employees could experience:

• A drop in payroll tax from 6.2 to 3.1 percent.

Adoption of any or all of the American Jobs Act (or any other payroll tax reduction measure) could leave employers scrambling to adjust payroll tax withholding.

These uncertainties can create a quagmire for business owners.

Even if legislation is not passed prior to January 1, 2012, employers may be subjected to retroactive payroll tax cuts adopted later in 2012.

“A lot of people still do payroll at the kitchen table on Thursday night to hand out Friday,” says John W. Kennedy, Director of Payroll Services with Insperity.

Kennedy estimates that less than 30 percent of firms with one to 100 workers are using automated payroll services, and are therefore inherently more likely to make mistakes. “A lot of businesses withhold the wrong amount,” he adds.

To prevent errors, companies should either outsource payroll to an external provider who will insure compliance with the current Social Security withholding requirements, or establish an internal policy and process that adopts a vigilant approach to monitoring and managing payroll tax withholding.

“Employers without someone to help them stay on top of the laws are running the risk of non-compliance penalties for under-withholding,” Kennedy notes.

If the American Jobs Act or similar legislation is not adopted, of the estimated 161 million workers who will pay Social Security taxes in 2012, about 10 million will pay higher taxes due to the increase, according to the Social Security Administration. Some experts have speculated that it’s likely a payroll tax reduction measure will be enacted to insure the economy does not falter prior to the upcoming election.

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