NOTE: Isberg’s group sent lawmakers a letter today, warning that there is “insufficient lead time” to implement the separate limit for January and February, which would require significant programming changes.
Payroll Processors Fume as Congress Fiddles on Tax-Cut Extension
December 19, 2011
Payroll processors are watching Congress with frustration as a Dec. 31 deadline for extending a payroll tax cut nears, and are warning companies about the difficulty of implementing a temporary provision passed by the Senate.
Payroll companies can react quickly to a yearlong extension for the first paycheck of 2012 or adjust the second paycheck to correct problems, said Pete Isberg, president of the National Payroll Reporting Consortium, an industry group. Payroll providers still don’t like a second consecutive year of December tax law changes or the Senate-backed two-month extension of the tax cut that could create unprecedented complications.
“Payroll people feel like their concerns are not heard at the congressional level sometimes,” said Mike O’Toole, who oversees government relations at the American Payroll Association. “Or else, Congress wouldn’t even consider something like a two-month extension that in the end is going to cost companies more money to pay for reprogramming systems.”
In a typical year, the 12.4 percent payroll tax that funds Social Security is split evenly between employers and employees. In 2011, under a tax law signed by President Barack Obama on Dec. 17, 2010, employees pay 4.2 percent while employers continue to pay 6.2 percent.
The wage base for the tax is capped at a level that is adjusted annually for inflation. In 2012, the tax won’t be assessed for wages above $110,100.
Payroll Tax Options
Obama pushed to drop the tax rate on the employees’ side to 3.1 percent for 2012 and expand a variation on the tax cut to employers.
On Dec. 13, the House of Representatives passed a bill that would extend the expiring 4.2 percent rate for all of 2012.
Four days later, the Senate responded with a two-month extension of the 4.2 percent rate. House Republicans, who are planning a vote tonight, are objecting to the Senate plan and citing Isberg’s analysis.
The Senate added a twist. Under its bill, only the first $18,350 of wages would be taxed at the lower rate. That’s one- sixth of the $110,100 annual limit, and the provision was designed to prevent the benefits from flowing to high-income workers who would be paid more than $18,350 in the first two months of the year.
The legislation also limits workers from shifting the timing of their income to take advantage of the lower rate in the first two months of the year. More than 10 percent of the workforce will reach the $18,350 limit, Isberg wrote.
The two-month proposal would cause logistical problems, said Isberg, who works at Automatic Data Processing Inc. but wasn’t speaking for the company.
“System-wise, it would cause more problems than if nothing were done,” O’Toole said.
Isberg’s group sent lawmakers a letter today warning that there is “insufficient lead time” to implement the separate limit for January and February, which would require significant programming changes.
The approach, he wrote, “could create substantial problems, confusion and costs affecting a significant percentage of U.S. employers and employees.”
Instead, Isberg wrote, enacting the 4.2 percent rate retroactively during 2012 would be easier to implement, because many payroll systems self-correct when tax rates change.
‘Feel the Confusion’
Smaller businesses that use off-the-shelf software or prepare pay stubs by hand would also face difficulty complying with late changes.
“It’s a complication in the employer’s life and I think the smaller employers are the ones who are going to feel the confusion more directly,” said Abe Schneier, a senior technical manager at the American Institute of Certified Public Accountants in Washington.
People who are self-employed and pay both the employer and employee sides of the tax also will have trouble ensuring they make the correct quarterly estimated tax payments, he said.
Schneier said he thought that large payroll providers would face complications but would largely be able to manage the changes.
Congress is reprising its last-minute tax legislating from last year. In December 2010, the income tax brackets also were in flux because Congress was debating the extension of the 2001 and 2003 tax cuts.
“That was pretty seamless,” Isberg said. “It was a lot of work on short notice, but it got done.”