Taxes Likely To Take 2% More From Paychecks

The odds are good that taxes will take a bigger bite – at least 2 percent – out of your January paychecks.

While other tax questions are up in the air, pending possible resolution of the “fiscal cliff,” expiration of the Social Security payroll tax cut would automatically increase the Social Security withholding from 4.2 percent to 6.2 percent. It is not expected to be extended.

“(For) the average guy making $500 every time he gets paid, there’s going to be a $10 difference in pay,” said Nestor Romero, owner of The Payroll Company in Albuquerque.

Workers making about $50,000 a year would take home about $40 less every two weeks, according to another estimate.

But no one – including the Internal Revenue Service, employers or tax consultants – on Friday knew for sure, lacking guidance on what withholding taxes will be in play in 2013.

The IRS, which would typically have released payroll withholding tables by now, is waiting to see how Congress addresses the year-end “fiscal cliff” when sharp tax increases and government spending cuts are slated to take effect. The agency this week said it intended to issue guidelines before the end of the year, but had not done so as of late Friday.

About a half-dozen different tax bills “that have been enacted, or been extended year by year … are all going to go away” if lawmakers take no action, said James Hamill, director of Tax Practice at Reynolds, Hix & Co. in Albuquerque and a tax columnist for the Journal.

“And some of those are going to affect high income people, some will affect low income and some will affect middle income,” he said.

Causing the biggest near-term impact on individual pocketbooks is the end of the two-year Social Security payroll tax cut and increase in the federal income tax rates with expiration of the Bush tax cuts, said Joe Speroni, president and CEO of payroll process provider Payroll New Mexico.

“All of this could change at any moment,” he added.

Federal income tax rates would rise on everyone with expiration of the Bush-era tax cuts, which, among things, reduced income taxes by reducing tax rates and the marriage penalty, repealed limitation of personal exemptions and itemized deductions, and expanded refundable credits.

Also set to expire are the alternative minimum tax patch that increased the amount of income exempt from the AMT and a series of previously extended temporary tax provisions known as tax extenders, Hamill said.

In addition, because of the Affordable Care Act, there’s a new 3.8 percent surtax on high income individuals with passive incomes, such as dividend or interest incomes, he said.

All told, the fiscal cliff would boost taxes by an estimated $586 billion in 2013. For taxpayers with incomes of $40,000 to $65,000, paychecks would shrink an average of about $1,500 for the year, according to the non-partisan Tax Policy Center.

Any tax increase now is bad for the still-struggling economy, said Terri Cole, president and CEO of the Greater Albuquerque Chamber of Commerce.

“The most difficult thing about the fiscal cliff problem is that it’s happening in the middle of a recession,” she said. “So if they don’t come to some agreement and businesses and individuals have to pay more in whatever category, it will simply make matters worse.”

Added Minda McGonagle, state director of the National Federation of Independent Business/New Mexico. “Raising taxes on small businesses stifles their ability to grow and create jobs.”

The working taxpayer isn’t the only one dealing with the uncertainty, however. Employers and payroll processors in New Mexico and across the country are bracing to have to react quickly to whatever tax withholdings Congress ultimately authorizes.

“I heard … members of Congress saying that, ‘well, we could fix it after Jan. 3 and that’s not a big deal,’ ” Hamill said. “But it’s a huge deal for employers trying to deal with this.”

No matter what Congress does to address the “fiscal cliff,” it’s already too late for employers to accurately withhold income taxes from January paychecks unless the unlikely occurs and all current tax rates remain the same.

For payroll processing companies like Paychex, which serves clients in 50 states including over 800 in New Mexico, swiftly adjusting to a new tax withholding tax table is not a major issue, said Michael Trabold, director of compliance risk for Paychex. It could be a different, more difficult story for small employers that do their own payrolls, he said.

“It is, without a doubt going to be very challenging, both to stay on top of all these changes and, if something does happen before the end of the year, to just go in and make those changes in a really abbreviated time frame,” he said.

Michael O’Toole of the American Payroll Association said many employers plan to hold income taxes at 2012 rates, at least for the first one or two paychecks of the year. If they don’t withhold enough taxes in January, they would have to withhold even more later in the year to make up the difference.

A last-minute deal could avert the fiscal pain. And even if there is none, policymakers could retroactively reduce tax rates if one is reached later.

The LA Times and Associated Press contributed to this report.
— This article appeared on page A1 of the Albuquerque Journal