Payroll services giant ADP said Wednesday that it has been monitoring the fiscal cliff deal and has been in constant contact with the Internal Revenue Service regarding the changes in tax rates.

Congress passed fiscal cliff legislation late Tuesday, raising the top income tax rate to 39.6 percent for single taxpayers earning over $400,000 a year and married couples with income over $450,000 a year (see Congress Approves Fiscal Cliff Deal). The 2 percentage point payroll tax cut of 2011 and 2012 was not part of the budget deal, so Social Security payroll taxes revert to 6.2 percent in 2013. The IRS issued new withholding tables late Monday that take into account the higher payroll taxes, but it was before the Senate or the House had voted on the fiscal cliff deal, so it does not take into account the tax cut extensions and 39.6 percent tax rate on upper-income earners (see IRS Changes Income Tax Withholding Tables for 2013 to Reflect Expired Tax Cuts). The IRS is likely to modify the tables soon.

ADP said it is ready to assist clients in understanding and addressing any tax law changes that will affect payroll and employment tax administration this year.  The company’s payroll services are used for 24 million Americans, or one out of six U.S. workers. ADP noted that it has addressed tax law modifications in a timely manner for more than 60 years.

ADP has been regularly sharing legislative updates through its "Eye on Washington" section of ADP.com, an online resource dedicated to keeping clients informed of federal regulatory activity that impacts payroll and employment tax administration.

Now that the House and Senate have passed H.R. 8, the American Taxpayer Relief Act of 2012, President Obama is expected to sign the bill into law within 24 hours. ATRA includes several changes to tax laws affecting payroll and employment tax administration in 2013, which will generally be effective upon enactment, ADP noted.

ATRA effectively maintains the reduced income tax rates adopted in 2001 and 2003 for individuals earning up to $400,000 and families earning less than $450,000.  Income above those levels will be taxed at 39.6 percent, up from 35 percent. The expanded 15 percent bracket for joint filers, commonly referred to as the marriage penalty relief, has also been extended. These tax rates have been extended permanently for wages paid after Dec. 31, 2012. 

Employee Social Security tax rates have returned to 6.2 percent for 2013 wages up to the taxable wage limit of $113,700. Prior to 2013, the Social Security tax rate was 4.2 percent.  

In addition, although not affected by the ATRA, the Patient Protection and Affordable Care Act established a new "Additional Medicare Tax" of 0.9 percent, which goes into effect in 2013. The new Additional Medicare Tax applies to single individuals earning over $200,000 and married couples who earn over $250,000 and file jointly. However, employers must withhold the Additional Medicare Tax from all workers, regardless of marital status, from wages exceeding $200,000.

Thus, the employee Medicare tax rate, normally 1.45 percent, will rise to 2.35 percent on earnings over $200,000, regardless of filing status. The employer Medicare tax rate remains 1.45 percent. There is no taxable wage limit for Medicare taxes.

ADP said its experts have been closely monitoring the progress of the American Taxpayer Relief Act of 2012, and assessing its impact to employers. There are many other provisions that are part of ATRA that will impact both employers and employees. ADP maintains a dedicated team of professionals who carefully monitor all federal and state legislative and regulatory measures affecting human resource, payroll, tax and benefits administration, and ensure that ADP systems are updated as relevant laws evolve. For the latest federal tax law changes, visit the ADP "Eye on Washington" web page located at www.adp.com/regulatorynews.