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Prepare for Social Security changes in 2013

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in Small Business Tax,Small Business Tax Deduction Strategies

The Social Security Administration (SSA) a­n­­nounced its annual cost-of-living adjustments (COLAs) for 2013.

Alert: There’s some good news for retirees, some bad news for both employers and some em­­ployees, and some worse news for all workers.

Here’s a quick rundown of the key changes.

The good news: Monthly Social Security and Supplemental Security Income (SSI) benefits for almost 62 million Ameri­­cans will increase 1.7% in 2013. The maximum monthly Social Security benefit for someone who begins collecting benefits at full retirement age will be raised to $2,533 (up from $2,513 per month in 2012).

The bad news: No surprise here, but the Social Security ceiling on wages and self-employment income is going up again. It will jump from $110,100 in 2012 to $113,700 in 2013.

Worse news: It’s not a COLA that was an­­nounced by the SSA, but the Social Security tax rate paid by employees will revert to the normal 6.2% on amounts up to the $113,700 wage ceiling in 2013. For 2011 and 2012, Congress knocked down this rate by 2 percentage points to 4.2% for employees, but not employers. A comparable tax break applied to self-employeds. The 2-percentage-point reduction was not extended into 2013.

Combined with the 1.45% Medi­­care rate on all wages, an employee will pay a 7.65% rate on salary up to the $113,700 ceiling in 2013, as opposed to only 5.65% in 2012. Self-employment individuals will pay 15.3% on self-employment income up to the $113,700 ceiling in 2013, as opposed to only 13.3% in 2012. It’s an across-the-board tax increase.

Tip: For all the Social Security COLAs for 2013, see the SSA's fact sheet.

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