Bloomberg News

Payroll Processors Fume as Congress Fiddles on Tax-Cut Extension

December 29, 2011

Dec. 20 (Bloomberg) -- Payroll processors are warning that a two-month payroll tax-cut extension passed by the U.S. Senate would be difficult to implement.

Payroll companies can react quickly to a yearlong extension for the first paycheck of 2012 or adjust the second paycheck to correct problems, said Pete Isberg, president of the National Payroll Reporting Consortium, an industry group. Payroll providers underscore that they don’t like a second consecutive year of December tax law changes or the Senate-backed two-month extension of the tax cut that could create unprecedented complications.

“Payroll people feel like their concerns are not heard at the congressional level sometimes,” said Mike O’Toole, who oversees government relations at the American Payroll Association. “Or else, Congress wouldn’t even consider something like a two-month extension that in the end is going to cost companies more money to pay for reprogramming systems.”

The Treasury Department said it would help to make the two- month plan workable. “It is feasible to implement the bipartisan Senate bill, and the Treasury Department will work with employers to ensure the smoothest possible implementation,” Jenni LeCompte, a department spokeswoman, said in an e-mail.

In a typical year, the 12.4 percent payroll tax that funds Social Security is split evenly between employers and employees. For 2011, in a tax law signed by President Barack Obama on Dec. 17, 2010, employees pay 4.2 percent while employers continue to pay 6.2 percent.

Wage Base Cap

The wage base for the tax is capped at a level adjusted annually for inflation. In 2012, the tax won’t be assessed for wages exceeding $110,100.

Allowing the payroll tax cut to expire would hurt consumer spending and confidence, said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

“Congress would once again be placing the recovery at risk by playing the political games they seem to enjoy playing,” he wrote in an e-mail yesterday.

Obama pushed to lower the tax rate on the employees’ side to 3.1 percent for 2012 and expand a variation of the tax cut to employers.

On Dec. 13, the House of Representatives passed a bill to extend the expiring 4.2 percent rate for all of 2012. For an individual earning $50,000 in 2012, the savings would amount to $1,000 over the course of the year, compared with the regular 6.2 percent tax.

A Seamless Change

Payroll companies say the yearlong change could happen seamlessly even if Congress waits to pass a 2012 extension until the last days of 2011.

“The simple rate change is really a layup for us,” said Frank Fiorille, director of risk management at Paychex Inc., which handles payroll processing for 564,000 small and medium- sized employers. “In fact, we can go right down to the last hour to get it done and have it work pretty effectively.”

On Dec. 17, the Senate passed a two-month extension of the 4.2 percent rate. House Republicans have objected to the Senate plan and were citing Isberg’s analysis yesterday.

The Senate added a twist to the extension, only allowing the first $18,350 of wages to be taxed at the lower rate. That’s one-sixth of the $110,100 annual limit. The provision was designed to prevent the benefits from flowing to high-income workers who would be paid more than $18,350 in the first two months of the year.

Without that $18,350 cap, someone earning wages of more than $660,600 would be able to get the full year’s benefit of the tax cut before the end of February.

Limiting Reduction

The legislation also limits workers who could otherwise shift the timing of their income to take advantage of the lower rate in the first two months of 2012. More than 10 percent of the workforce will reach the $18,350 limit, Isberg wrote.

The two-month proposal would cause logistical problems, said Isberg, who works at Automatic Data Processing Inc. but wasn’t speaking for the company.

“System-wise, it would cause more problems than if nothing were done,” O’Toole said.

Isberg’s group sent lawmakers a letter yesterday warning that there is “insufficient lead time” to implement the separate limit for January and February, which would require significant programming changes.

The approach, he wrote, “could create substantial problems, confusion and costs affecting a significant percentage of U.S. employers and employees.”

Easier to Implement

Instead, Isberg wrote, enacting the 4.2 percent rate retroactively during 2012 would be easier to implement, because many payroll systems self-correct when tax rates change.

Fiorille, of Rochester, New York-based Paychex, said the $18,350 cap would create a new wrinkle that would cause difficulty and extra work during the payroll industry’s busy season.

“We’ll do it,” he said. “We always get it done.”

Smaller businesses that use off-the-shelf software or prepare pay stubs by hand would also face difficulty complying with late changes.

“It’s a complication in the employer’s life and I think the smaller employers are the ones who are going to feel the confusion more directly,” said Abe Schneier, a senior technical manager at the American Institute of Certified Public Accountants in Washington.

People who work for themselves and pay both the employer and employee sides of the tax will have trouble ensuring they make the correct quarterly estimated tax payments, he said.

Schneier said he thought that large payroll providers would face complications, though would largely be able to manage the changes.

Congress is reprising its last-minute tax legislating from last year. In December 2010, the income tax brackets also were in flux because Congress was debating the extension of the 2001 and 2003 tax cuts.

“That was pretty seamless,” Isberg said. “It was a lot of work on short notice, but it got done.”

--With assistance from Meera Louis in Washington. Editors: Jodi Schneider, Jim Rubin.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net


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