WASHINGTON Workers probably wont feel the full brunt of next years tax increases in their January paychecks, but dont be fooled by the temporary reprieve.
No matter what Congress does to address the year-end fiscal cliff, its 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 Jan. 1, so workers should immediately feel the squeeze of a 2-percent cut in their take-home pay. But as talks drag on about 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 OToole of the American Payroll Association.
If employers dont 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, thats 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, thats about $142 a paycheck.
OToole 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 cant really just come up with withholding tables on their own, depending on what the rates are, OToole 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 wont 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.