Wednesday, October 27, 2010

Why Your Tax Witholding Is Likely to Go Up in 2011 (Even if you earn less than $250,000)

Your pay check is likely to shrink in 2011, thanks to the dithering idiots in Congress.

Congress has still not voted on an extension of the Bush-era tax cuts--for anyone. The rich, the poor, you.

Congress hasn't even started debating whether to extend the cuts, which expire Dec. 31. Because it takes weeks to prepare withholding schedules, this means the Internal Revenue Service will likely assume the cuts will expire and direct employers to increase payroll deductions starting Jan. 1.

Got that? Even if an  extension is eventually voted by Congress, if it is not done quickly (Huh, Congress acting quickly) the IRS is likely to send out 2011 withholding schedules assuming no Bush tax extension.

“I’ve been doing payroll for probably close to 30 years now, and never have we seen something like this where it gets that down to the wire,” Dennis Danilewicz, who manages payroll services for about 14,000 employees at New York University’s Langone Medical Center told Bloomberg. “That’s what’s got a lot of people nervous. All we can do is start preparing communications with a couple of different scenarios.”
More from Bloomberg:
If Congress fails to act, income tax rates will revert to higher levels dating from June 2001.

For a married couple with an income of $80,000, that would drain an extra $221.48 in withholding from a semi-monthly paycheck, according to calculations by the Tax Institute at H&R Block. Married individuals earning $240,000 a year would lose an additional $557.78 to withholding in a single semi-monthly paycheck. The Tax Institute at H&R Block calculated federal tax rates for single-income earners and married taxpayers without children.

Paychecks could shrink in January and into February, depending on how long it takes Congress to act.

January could well be a time of “sticker shock” for salaried employees and their employers, said Kathy Pickering, executive director of the Tax Institute, an independent research division at Kansas City, Missouri-based H&R Block Inc.

“If the laws get passed late in December, it’s just necessarily going to take one to three weeks to get those payroll tables updated and implemented into the system,” Pickering said...

Making a withholding-rate change could take longer for small businesses that don’t outsource payroll services, experts said. If a business can’t react fast enough, employees could recoup any over-withholding by filing a new W-4 tax form to temporarily lower their federal withholding rate.

Another option is to wait until 2012 when workers file their tax returns for the previous year.

Taxpayer Strategy

Taxpayers could use the same strategies if Congress reinstates the tax cuts next year and they need to recoup the extra withholding.

Jodi Parsons, manager of payroll and accounts payable at IFMC, a health care management company based in West Des Moines, Iowa, said if the IRS issues two sets of withholding tables, her two-person office could be overwhelmed with processing changes to W-4 forms.

“We’d have to basically go back and hand calculate checks for all 800-900 employees to determine whether or not we need to deduct additional taxes from them or refund taxes,” Parsons said. “We’d like to see changes in mid-November just to make sure we have time.”

There are now six federal tax brackets, ranging from 10 percent to 35 percent. If Congress doesn’t act, there will be five rates with the top bracket reaching 39.6 percent.

Nov. 20 notice

Last year, the IRS alerted payroll departments on Nov. 20 about the 2010 tax tables, said Scott Mezistrano, senior manager of government relations at the American Payroll Association in Washington. He said a delay in guidance from the IRS could increase costs for some small businesses.

The Treasury Department last week issued a statement that it was “maintaining flexibility” with regards to the release of the withholding tables for 2011. If the IRS issues tables in mid-November and then again later, businesses will double their programming costs, Mezistrano said. A related concern, he said, is if Congress makes a last-minute decision to extend the cuts and companies aren’t able to implement the change before January.
Business owners may face “tons of angry employees pounding at my office door saying, ‘What have you done to my paycheck?’” Mezistrano said.

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