U.S. Tax Vote May Be Too Late to Cut Social Security Levy Jan. 1
U.S. President Barack Obama
Roger L. Wollenberg/Pool via Bloomberg
U.S. President Barack Obama yielded to Republican demands to extend Bush-era income-tax cuts for two years for all taxpayers, including the highest-earning Americans.
U.S. President Barack Obama yielded to Republican demands to extend Bush-era income-tax cuts for two years for all taxpayers, including the highest-earning Americans. Photographer: Roger L. Wollenberg/Pool via Bloomberg
Dec. 9 (Bloomberg) -- Austan Goolsbee, chairman of the White House Council of Economic Advisers, talks about the agreement reached between President Barack Obama and Republican lawmakers to extend Bush-era tax cuts for all income levels. House Democrats voted to block a floor debate on Obama’s tax deal, in a non-binding move to force changes in the proposal. Goolsbee talks with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
A vote in Congress on a tax deal may come too late for some employers to reduce the Social Security levies withheld from paychecks by the start of next year, payroll industry executives said.
“At this point, no matter how quickly Congress acts, that’s not going to happen for some employers,” Scott Mezistrano, senior manager of government relations at the American Payroll Association in Washington, said in a telephone interview.
Lawmakers are weighing an agreement hammered out with President Barack Obama to extend Bush-era income-tax cuts and to reduce payroll taxes, which fund Social Security and Medicare. The payroll tax cut will save Americans $111.7 billion in 2011, according to an estimate last night by the congressional Joint Committee on Taxation. The tax deal is likely to boost consumer spending and economic growth next year if it’s approved, economists say.
The Social Security tax is just one of the headaches facing companies and workers as the end of the year approaches. Employers also are waiting for the Internal Revenue Service to issue income tax withholding tables and guidance on changes.
The Internal Revenue Service and the Treasury Department declined to comment on how firms should prepare for the changes. Last year, the IRS alerted payroll departments on Nov. 20 about 2010 tax tables. Companies are contending with the possibility they might have to revert to a higher withholding rate -- and take more from employees’ paychecks -- if Congress doesn’t extend the tax cuts passed in 2001 and 2003.
‘Big Issue’
“Timing becomes a really big issue,” said William Dunkelberg, chief economist of the National Federation of Independent Business, in a telephone interview. “When you don’t know what your rates are for next year, you don’t know how to make those decisions.”
Obama yielded to Republican demands to extend Bush-era income-tax cuts for two years for all taxpayers, including the highest-earning Americans. Democrats sought to limit the tax reductions, which expire Dec. 31, to the first $250,000 of annual income.
The tax deal would also give businesses credits for research and lower the payroll taxes for a year. Social Security taxes for workers would drop to 4.2 percent from 6.2 percent, while the cost for the employers’ share would stay at the higher level. For the first time since 1989, workers and companies would pay different rates for these taxes.
Federal Employees Protest
Federal employees’ unions are protesting the proposed change because 600,000 workers don’t pay any Social Security tax, instead contributing 7 percent of their salaries into a civil service pension system. Those workers would pay more by losing a different Making Work Pay tax credit worth up to $800 per couple the payroll-tax cut is designed to replace.
“This unequal treatment of federal employees is unfair,” National Treasury Employees Union President Colleen Kelley said in a letter to House lawmakers yesterday. She urged that a one- year, 2% reduction in employee contributions to the pension system “or a similar remedy, be included in any payroll tax holiday legislation.” The pension system doesn’t cover more recent entrants to the workforce.
The Joint Committee on Taxation’s $111.7 billion estimate for the size of the payroll tax cut is smaller than the $120 billion figure provided by the White House earlier this week.
Big companies and those that hire outside firms to process payroll operations may be able to adjust to the new changes in about two weeks, said Pete Isberg, president of the National Payroll Reporting Consortium.
Extra Time
The IRS probably will give extra time to companies that can’t change course quickly, he said, as it did in 2003, when tax tables also weren’t ready in time for the first paychecks of the year. Isberg regularly participates in industry conference calls with the IRS.
Mezistrano said firms that aren’t ready by Jan. 1 will have more work to do. Companies will need to reimburse employees who had too much Social Security tax taken out of initial 2011 paychecks, while income tax changes -- such as differences in the way married couples are assessed -- could complicate household tax planning.
Mezistrano said his organization wants the IRS to issue advice although, he said, the agency may be keeping mum so as not to add further confusion.
Growth Estimates Raised
The tax accord may raise gross domestic product next year by as much as half a percentage point to about 3.1 percent, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Tom Porcelli, a senior economist at RBC Capital Markets Corp. in New York, is raising his growth forecast for 2011 by one point, also to 3.1 percent.
A smaller paycheck in January may have some effect on consumer spending although Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania, said households are weighing more than take-home pay before spending.
Job security remains the “overriding concern” for households deciding whether to save or spend, Naroff said. “It’s not an issue of income, it’s an issue of confidence.”
To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net;
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
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