Important: 2013 Payroll Tax Updates for Churches

This post was last updated on February 20th, 2024 at 09:31 am.

You may have heard or read about the expiring tax cuts coupled with across-the-board government spending cuts that were due to be effective December 31, 2012. Many dubbed this the “Fiscal Cliff”.

Congress let the December 31, 2012 deadline pass without passing legislation that would have averted this economic disaster. However, in early 2013 legislation was passed to extend a lot of these tax cuts. Unfortunately, the provision to extend the 4.2% FICA tax withheld from employee paychecks was not included in this provision.

What does this mean for churches?

Effective January 1, 2013, there are four important payroll tax updates that churches should be aware of. Two of the updates affect every church who has payroll. The other two are more likely to apply to large churches only. The payroll updates are as follows:

1. Effective January 1, 2013, churches should withhold 6.2% FICA tax from employee paychecks (up from 4.2% in 2010 through 2012). Total Social Security withholding from employee paychecks will be 6.2% for FICA and 1.45% for Medicare, for a combined total of 7.65%. As in past years, the employer portion will remain at 6.2% for FICA and 1.45% for Medicare. When making payroll tax deposits, the combined withholding will be 15.3% (7.65% employee plus 7.65% employer).
2. As of the writing of this article, the Internal Revenue Service (IRS) has stated that employers should still use the 2012 income tax withholding tables to calculate federal income tax withheld from 2013 paychecks. This will be effective until further instructions are received from the IRS. 01/04/2013 Update: On January 3, 2013 the Internal Revenue Service (IRS) issued new 2013 income tax withholding guidance to calculate federal income tax withheld from 2013 paychecks. The guidance issued on January 3rd only includes the percentage-method rates – not the full tables. The IRS states that the new 2013 tables should be available sometime in early 2013. The IRS also states that employers should begin to use the new 2013 rates and tables no later than February 15, 2013. The new tables will be found in the 2013 IRS Publication 15  ” Circular E – Employer’s Tax Guide”. For more information refer to http://www.irs.gov/uac/Newsroom/IRS-Provides-Updated-Withholding-Guidance-for-2013 for the 2013 percent-method guidance and to the IRS website at http://www.irs.gov/.
3. The 2013 Social Security wage base has increased to $113,700 from $110,100 in 2012. This means that employees will be taxed at the 6.2% FICA tax rate until they reach gross wages of $113,700. If wages exceed this amount, no additional FICA tax is withheld. As a side note, wages subject to Medicare tax do not have this limit, so for  2013, Medicare tax would still be withheld at 1.45% for wages in excess of $113,700.
4. Effective January 1, 2013, taxable Medicare wages in excess of $200,000 are subject to an extra .9% Medicare tax. Total Medicare tax withheld for wages in excess of $200,000 will be 2.35% for the employee portion (1.45% plus the additional .9% for wages in excess of $200,000).This tax will only be withheld from employee wages. Employers do not have to “match” this amount. (Employer portion will be 1.45% even if wages are in excess of $200,000.)

As always, be sure to consult your CPA or accountant for payroll tax and other tax matters.

This post was written by Karla, an accountant with Icon Systems:

Karla is a CPA licensed in the states of Minnesota and North Dakota and has over 20 years of accounting experience. She has a servant’s heart for working with churches. When not at work, she enjoys gardening, reading, Bible study, and spending time with her friends and family.

Photo Credit: somadjinn