WASHINGTON (AP) — Workers probably won’t feel the full
brunt of next year’s tax increases in their January paychecks, but don’t
be fooled by the temporary reprieve.
No matter what Congress does
to address the year-end fiscal cliff, it’s already too late for
employers to accurately withhold income taxes from January paychecks,
unless all the current tax rates remain unchanged, which is an unlikely
scenario.
Social Security payroll taxes are set to increase on
Jan. 1, so workers should immediately feel the squeeze of a 2 percent
cut in their take-home pay. But as talks drag on over how to address
other year-end tax increases, the Internal Revenue Service has delayed
releasing income tax withholding tables for 2013.
As a result,
employers are planning to withhold income taxes at the 2012 rates, at
least for the first one or two paychecks of the year, said Michael
O’Toole of the American Payroll Association.
If employers don’t
withhold enough taxes in January, they will have to withhold even more
taxes later in the year to make up the difference. Otherwise, taxpayers
could get hit with big tax bills, and possibly penalties, when they file
their 2013 returns.
The tax increases could be steep. If Congress
fails to act, workers at every income level face significant tax
increases next year as part of the year-end "fiscal cliff."
A
taxpayer making between $50,000 and $75,000 would get an average tax
increase of $2,400, according to the Tax Policy Center, a Washington
research group. If the worker is paid every two weeks, that’s about $92 a
paycheck, on average.
Someone making between $75,000 and $100,000
would get a tax increase averaging nearly $3,700. If the worker is paid
every two weeks, that’s about $142 a paycheck.
O’Toole said it
would take most employers two weeks to four weeks to update their
payroll systems, once new tax withholding tables are released. For some
small businesses, it could take longer.
"Employers can’t really
just come up with withholding tables on their own, depending on what the
rates are," O’Toole said. "The smaller companies that do not use a
payroll processing service probably would have more problems than anyone
else."
On Friday, the IRS said it plans to issue guidance by the
end the year, though it won’t be early enough to affect paychecks in
early January.
"We are aware that employers have questions with
respect to 2013 withholding," the agency said in a written statement.
"Since Congress is still considering changes to the tax law, we continue
to closely monitor the situation. We intend to issue guidance by the
end of the year on appropriate withholding for 2013."
About
three-quarters of taxpayers got tax refunds this year, averaging $2,707,
according to the IRS. That gives most taxpayers some leeway to manage
their income tax withholding. However, many people rely on tax refunds
to pay bills or make major purchases.
"The reality is, the vast
majority of Americans do live paycheck to paycheck and that tax refund
is their most significant payday of the year," said Bob Meighan, vice
president of TurboTax, an online tax preparation service.
Most of
the expiring tax breaks were first enacted under President George W.
Bush and extended under President Barack Obama. Obama campaigned for
re-election on extending the tax cuts on incomes below $200,000 for
individuals and $250,000 for married couples. Obama would let the tax
cuts expire on incomes above those amounts.
In negotiations with
House Speaker John Boehner, Obama offered to raise the income threshold,
limiting tax increases to those making more than $400,000. Boehner, who
has argued for years that the tax cuts should be made permanent for
everyone, responded by trying to push a bill through the House that
would have let many of the tax cuts expire on incomes above $1 million.
Many
Republicans revolted and Boehner, R-Ohio, shelved the bill, sending
lawmakers home for the Christmas holiday and leaving the outcome of
talks in doubt as the new year approaches.
If Congress and the
White House cannot reach a deal, income tax rates would go up, estate
taxes and investment taxes would increase and the alternative minimum
tax would hit millions of middle-income people. A temporary payroll tax
cut that has benefited nearly every wage earner in 2011 and 2012
expires, costing the average family an additional $1,000 a year by
itself.
In addition, dozens of other tax breaks for businesses and
individuals that are routinely renewed each year already expired at the
end of 2011. Congress was expected to renew many of them by January, so
taxpayers could still claim them on their 2012 tax returns.
If
Congress doesn’t act on those tax cuts, businesses would lose a popular
tax credit for research and development as well as generous tax breaks
for investing in new plants and equipment. Individuals would lose
federal tax breaks for paying local sales taxes, buying energy efficient
appliances and using mass transit.
In all, taxes would go up by about $536 billion next year.
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Copyright 2012 The Associated Press.