This is a result of Congress not extending the two-year payroll tax cut as part of the "fiscal cliff" negotiations.
For many year before 2011, family child care providers paid 12.4% in Social Security taxes on their profit. Congress reduced this to 10.4% in 2011 and extended it again in 2012 because of the weakness in the U.S. economy. Medicare taxes remained at 2.9% for all of these years.
Child care providers will now go back to paying 15.3% of their profit in 2013 on Social Security/Medicare taxes, up from 13.3% in 2012 and 2011.
How much more in taxes will you have to pay in 2013? For every $1,000 of profit you make in 2013 you will owe an additional $20 in taxes. If you will pay quarterly estimated taxes in 2013, you should take this higher tax rate into account and pay in more money.
If you hire employees in 2013, you must now withhold 2% more in Social Security taxes from your employee's paycheck. In 2012 this rate was 4.2% and in 2013 this rate will be 6.2%. The amount to withhold for Medicare tax remains at 1.45%. Thus, the total in Social Security/Medicare tax withholding for 2013 is now 7.65%, up from 5.65% in 2012 and 2011. As an employer, your share of these taxes has not changed, and remain at 7.65%. In other words, you will withhold 7.65% of your employee's wages for these taxes, and pay another 7.65% out of your pocket, for a total of 15.3%.
The net result of this change is that it will not cost you more to hire an employee, since the extra tax comes out of the employee's pay.
See my previous article on the lowering of the Social Security tax rate for 2012.
Tom Copeland - www.tomcopelandblog.com
Image credit: padgettpayrollservices.com