The “fiscal cliff” talks are ongoing in Congress. But at this point, it looks like the chances are slim lawmakers will reach a deal that doesn’t include tax increases for all employees — and new withholding requirements for employers. When will the new tax increases hit?
Most likely, employees’ paychecks won’t be impacted until early February.
Reason: The IRS has yet to release new income tax withholding tables for 2013.
It’s been waiting to see what, if any, deal lawmakers are able to strike to avoid the “fiscal cliff,” which is a term used to describe the onslaught of tax increases, government spending cuts and a lowering of the federal deficit ceiling scheduled to take effect Jan. 1 unless Congress put new laws in place by the end of 2012.
The IRS has said it plans to issue new withholding guidance by the end of the year, but that won’t give employers enough time to update their payroll systems to affect January paychecks.
How much more will they pay?
Here’s what employees face: If nothing changes in Congress, Social Security payroll taxes will increase to the old rate of 6.2% from the 4.2% rate imposed by the Bush tax cuts, which will expire at the end of the year unless Congress votes to extend them.
All told, the tax increases would amount to a pretty steep decrease in take-home pay.
According to calculations from the Tax Policy Center, reported by The Associated Press, a worker making between $50,000 and $75,000 annually would see an average tax increase of about $2,400 — or about $92 per bi-weekly paycheck.
Someone making between $75,000 and $100,000 would be forced to shell out an additional $3,700 on average — about $142 a check.
The bad news for employers: This is probably going to come a quite a shock to workers and is bound to create a dip in morale as well as a slew of questions directed at you.
Worse yet, because January paychecks aren’t likely to be impacted by the additional withholding, more funds will have to be withheld the rest of the year to make up the difference, or employees will be hit with a bigger tax bill come April 15, 2013. So paychecks from February on are bound to be shrunk by as much as $100 to $154 each.
To prevent the sticker shock — and ensuing employee anger — now would be the time to start communicating to workers that their checks are likely to be smaller come February.
Another likely scenario is that more employees will come to you asking for a raise to offset the tax increases. If that’s the case, it may be time to have one of these conversations.