Payroll departments brace for congressional verdict on tax cuts

The decision by Senate Democratic leaders to delay a vote on the Bush-era tax cuts until after the election has put the payroll industry on high alert.

If Democratic leaders fail to determine the tax rates by Dec. 10, it could be too late for payroll administrators to withhold the right amount of tax from workers’ paychecks, according to industry officials.

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“The closer you get to the end of the year the more problems there’ll be,” Michael O’Toole, senior director of publications and government relations at the American Payroll Association (APA), told The Hill.

“If [the IRS] issues [withholding tables] within three weeks before the end of the year, most payroll systems will be able to implement them by Jan. 1,” O’Toole said. “We’re warning [payroll departments] that there is this uncertainty out there and you’re going to really have to pay attention and probably have to move on a dime when there is some certainty.”

Payroll departments process paychecks days or even weeks before they appear in workers’ mailboxes or bank accounts. This is especially true in December when the crush of year-end filing requirements force payroll clerks to complete paychecks early to avoid becoming overwhelmed with too many duties as the calendar draws to a close.

This means that if Congress postpones action on the Bush tax cuts beyond mid-December, the risk increases that paychecks will be taxed at rates that are no longer accurate.

“The later you go into December, without a doubt it becomes more problematic,” Michael Trabold, head of compliance risk management at Paychex, Inc., told The Hill.

“If we’re dealing with the old withholding tables than that could potentially be problematic,” he added.

Incorrectly taxed paychecks will cause logistical headaches as payroll departments scramble to avoid IRS penalties by figuring out which workers mistakenly over or under paid their taxes because Congress failed to extend the tax cuts in time.

“You could have several paychecks that clients will have gotten…that would have to be reversed,” Trabold said.

Trabold and O’Toole said the uncertainty surrounding the Bush tax cuts has elevated the level of anxiety among their clients and members.

“It’s a very busy time for any payroll department and this only creates more anxiety on top of all the year-end duties they have to deal with,” O’Toole said.

Under normal circumstances, withholding tax tables are released from the Treasury’s Internal Revenue Service (IRS) in mid-November to give payroll departments plenty of time to make needed adjustments to paychecks.

With Congress set to return to work after the Nov. 2 election, lawmakers will have approximately two weeks to decide the fate of the Bush tax cuts before the IRS deadline.

“If Congress has not acted to extend the middle-class tax cuts by [mid-November], Treasury will then make an appropriate determination about how to proceed,” a Treasury spokesperson told The Hill.

Sen. Mark Pryor (D-Ark.) told reporters Thursday that his Caucus has not discussed how paychecks would be affected by Congress tinkering with the tax cuts.

“I haven’t heard anybody say that in the Caucus,” he said.

Pryor said it’s possible the issue has been raised within the Senate Finance Committee, which has jurisdiction over tax policy.

“I feel like sometimes on the tax issues I’m one step removed,” he said. “I’m in the second conversation, not the first conversation.”

Several lawmakers also say there has been little discussion about extending the Making Work Pay tax credit beyond its Dec. 31 expiration date.

The credit was part of the American Recovery and Reinvestment Act of 2009 and provides up to $400 per individual and $800 per married couple. Most workers receive the credit directly in their paychecks by a reduction in their tax withholding.

If the credit expires, middle-class workers – the ones President Obama vowed would not see a tax increase – will get a tax hit in their paychecks of up to $34 per month for individuals and $67 for couples, according to APA.

The Advance Earned Income Credit is also slated to expire at the end of the year. It provides tax relief in paychecks for middle-class workers making as much as $40,000, in some circumstance. Workers could lose as much as $152 in monthly take-home pay if the credit expires, according to APA.

“People’s withholding is going to change even if the [Bush] tax rates don’t,” O’Toole said. “There will be a lot of employees asking their payroll people ‘why is this happening?’”