The Unicorn HRO Blog

2013 Payroll Tax

Posted Tuesday, December 18, 2012 by Ed Gettings

IRS Official: Use 2012 Withholding Methods
Until Treasury Issues New Employer Guidance


BNA Snapshot


Key Development: Payroll professionals press IRS, Congress for action on how to deal with 2013 income tax and Social Security withholding.


Potential Impact: With no tax policy accord on Capitol Hill, employers will scramble to implement any changes effective Jan. 1, 2013, affecting the accuracy of payrolls.

By Michael Trimarchi


With time running out on Capitol Hill for legislative action on soon-to-expire tax laws, the Internal Revenue Service said employers should rely on 2012 federal income withholding tables to begin processing paychecks for the new year.

Participants in an IRS payroll industry call Dec. 6 said that employers and service providers preparing to process payrolls for 2013 need to know how to calculate withholding on taxable income for the first payments in January.

Negotiations on Capitol Hill tax laws that expire Dec. 31, including the temporary reduction in the employee portion of the Social Security tax to 4.2 percent from 6.2 percent and the extension of tax cuts adopted under former President George W. Bush, have delayed federal policy decisions.

The Treasury Department has not released new withholding tables, which in previous years were available in late November or early December. Until the tables are issued, officials from the IRS forms and publications division said they could not provide payroll processing guidance to employers.

When asked if employers should continue using 2012 withholding methods for the first payments of 2013, John Tuzynski, chief of IRS employment tax operations, replied that “consistent with the past, that's what you have to do if there aren't new tables.”

Use of withholding methods from just prior to the tax cuts enacted in 2001 and 2003 was specifically not endorsed by IRS officials on the conference call, as too many other variables and calculations are considered beyond the tax rates in the development of withholding tables and methods.

“It's a very complex calculation that is done by Treasury that includes many items … so I wouldn't recommend that as a possibility or an option at this point,” said Michael Eckler of IRS Tax Forms and Publications.

Because the Internal Revenue Code provides the Treasury secretary with “fairly broad discretion to determine withholding tables,” it is possible that even if the 2001 and 2003 tax cuts were to expire, payroll professionals could withhold taxes using the 2012 rates for the first payday of 2013, officials and analysts told BNA in September.


The Treasury Department could soon release guidance on how employers should approach the first payrolls of 2013, Tuzynski said.

APA Urges Quick Action in Dealing With Expiring Tax Cuts

With congressional negotiations ongoing, payroll professionals face the prospect of reconciling inaccuracies if Congress fails to act soon on year-end tax policies, the American Payroll Association said Dec. 6 in a news release.

In particular, the APA said, employers and third-party service providers may have difficulty meeting payroll-processing deadlines.

A delay in legislation that extends beyond mid-December “doesn't give all businesses enough time to update and test their payroll systems for early January paychecks,” said Mike O'Toole, APA senior director of publications, education and government relations.

“Businesses need some direction so they can ensure accurate paychecks for their employees,” O'Toole said. “Our interest in any legislation to extend current tax relief is strictly policy-neutral; we offer no opinions about whether such an extension of tax relief or other stimulus measure is necessary or will bring about the suggested economic results.”

Letter to Congressional Leaders

The APA, along with the National Payroll Reporting Consortium, also sent a letter Nov. 21 to congressional leaders and Treasury Department officials seeking to collaborate with policymakers on tax legislation.

Legislative proposals under consideration should be made available as soon as possible so payroll service providers and software developers can assess implementation and compliance issues, the letter said.

“We would like the opportunity to collaborate with policy makers to ensure that any proposal is feasible and can be implemented by those affected with minimal cost, problems, and confusion for taxpayers, employers, and the government,” the letter said.

The groups noted that they have worked with the Treasury and congressional tax-writing committees in recent years on a number of proposals, including the Making Work Pay credit, the Hiring Incentives to Restore Employment (HIRE) Act, and the Temporary Payroll Tax Cut Continuation Act.

“One important element for payroll administration is the lead time between the enactment of the legislation and the date that the payroll systems will have to start processing the payrolls that effect the change,” the letter said. “In contrast to changes to income tax withholding calculations, changes affecting the Social Security tax often require a longer lead time for orderly programming, testing, and implementation due to the extensive self-adjustment features built into payroll systems.”

Depending on the complexity of the changes, the letter said that some employers, software developers, and service providers might not meet implementation deadlines, and IRS could face increased costs.


Payroll departments face

the prospect of inaccurate payrolls if Congress does not act quickly on tax policies.

“In addition, any Social Security tax change should have an effective date of Jan. 1, as payroll systems are generally designed to accommodate tax changes taking effect on such dates,” the letter said.


With regard to the temporary payroll tax cut, the Obama administration asked Congress to either extend the reduction of two percentage points in the employee-paid portion of Social Security taxes that has been in effect since 2011 or enact an equivalent policy. Republicans on Capitol Hill rejected the request, which was made Nov. 29.


Bill to Extend Payroll Tax Cut

Legislation (S. 3660) that would extend the payroll tax cut through next year and provide a tax credit for small businesses that hire additional workers was introduced Dec. 5 by Sen. Bob Casey Jr. (D-Pa.), chairman of the congressional Joint Economic Committee.

“The payroll tax credit has proven economic benefit,” Casey said in a statement issued Dec. 5. “The Joint Economic Committee released a report this week, which stated that extending the tax cut again while the economy continues to recover makes great sense both because middle class families count on it and because it will help drive consumer spending to keep the economy growing.”

A key criticism of the payroll tax cut is that it diverts money from the Social Security system. In a recent letter to members of Congress, AARP warned that “extension of the payroll tax holiday would undermine confidence in Social Security and put at risk the program's dedicated funding stream and the hard-earned benefits of millions of Americans and their families.”

Rep. Chris Van Hollen (D-Md.), ranking member of the House Budget Committee, said he was interested in finding an alternative to the payroll tax cut, if not a one-year extension of the program.

“Looking at its impact on the economy and jobs, it's one of the most effective tools we have,” Van Hollen said. “We should extend it or [find] an alternative to it.”

Rep. Kevin Brady (R-Texas), a senior member of the House Ways and Means Committee, said he sees a chance that using some sort of specific tax cut for workers could act as a good bridge between the payroll tax cut and fundamental tax reform that would permanently lower taxes.

President Obama, meanwhile, has insisted that the decreased Bush-era tax rates should be extended for families earning up to $250,000, but that the top two rates for the wealthiest earners should be increased.

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