How the Fiscal Cliff Could Affect Small Business Payrolls

The nation’s leading payroll group, the American Payroll Association, has determined that if Congress does not reach a compromise on tax rates by December 14, this could potentially create chaos for businesses that will need to implement any new changes when the first paychecks are issued in 2013. This issue poses the biggest threat to the 27 million small businesses in the U.S., most of which do their own payroll. This means that delays from Washington could end up costing small businesses with independent payroll systems both time and money as they will be required to quickly comprehend the individual implications of Congress’s plan and then apply those changes to their payroll system.

For small businesses with employees, there are several tax rates that may be affected. The most prominent is the rollback of the payroll tax holiday that has been in place for the past two years. Here, workers have been enjoying a 2 percent rate reduction (down to 4.2 percent) on their payroll tax, which funds Social Security. That rate is set to go back up again to 6.2 percent on the first $113,700 in wages in 2013. While this adjustment may be somewhat straightforward and simple to deal with, other looming changes may significantly complicate matters: for instance, if the Bush-era tax cuts expire or income tax rates rise as well.

American Payroll Association attorney Michael O’Toole has suggested two worst-case scenarios that could pose a real problem for small businesses. The first scenario involves Congress reaching an agreement after the first of the year and then applying the new tax rules retroactively. The second involves any agreement being put off temporarily until later in 2013: a situation that payroll software programs (which only calculate a year at a time) would not be able to easily accommodate.

Payroll software companies are standing by, poised to make the necessary changes to their programs once they hear word from Congress. They assert that time is of the essence here. President of Advantage Payroll Services Rob Basso projects that a simple change will take his company a half a day to implement, whereas a more complicated change might take a half a week. CEO of SurePayroll Michael Alter sees a grimmer picture, where a more complicated change may take up to two weeks for his online payroll provider to accommodate.

Reference:

Pagliery, Jose. “Fiscal Cliff Could Bring Paycheck Scramble” CNN Money. 12/6/12.