Accounting Service Alert

Dear Fellow Employer,

As you may likely be aware, most of the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (frequently referred to collectively as the Bush tax cuts) are scheduled to sunset (expire) at the end of 2010.  While there has been talk of extending the tax cuts in whole or in part into 2011 and potentially beyond, Congress failed to act on it prior to adjourning until after the November elections.

The tax tables you use as you prepare your employees’ paychecks are published by the Internal Revenue Service and incorporated into the software we all use to calculate the Federal withholding that reduces the gross pay to the net amount that is given to our staff based on their self-completed Form W-4. As employers, we have absolutely no control over the amount withheld yet we are who the employees question when their withholding creates a problem for them.

There are several possible scenarios with respect to 2011:

• The tax cuts are allowed to sunset

• The tax cuts are extended for all income levels

• The tax cuts are extended for only a portion of income levels

The issue we face as employers is that because no action has taken place and will not take place until November at the earliest, the IRS will likely have no choice but to issue the 2011 tables assuming that the tax cuts will expire so that the tables may be distributed in time for the first payrolls in calendar year 2011. Nearly every employee will see a decrease in their net pay as a result of the increased withholding and we are likely to face questions about why their checks are less in January than they were the month before.

What will be the impact on our staff? The Associated Press has published a calculator based on information from the Tax Policy Center that compares 2010 and 2011 under the scenario that the cuts sunset. Please note that each person or family’s situation is unique and it is quite possible that they will be impacted by items impossible to include in a simple calculator such as limits applied to personal exemptions and itemized deductions, an increase in capital gains rates and a reduction of the child tax credit.

To add insult to injury, should Congress approve an extension of the cuts in part or in whole, it could take weeks for the IRS to publish new tax tables and then more time for the software vendors to push them out to us. That would cause employees to be over-withheld for several pay cycles even if a change takes place. In that event, employees have a couple of choices:

• Wait to get that money back when they file their 2011 returns in 2012
• Adjust their future withholding by resubmitting a Form W-4 to their employer (the 2011 Form W-4 is not available at this time and would need to be revised following any decision to extend the sunset provisions).

Sincerely,

Your Sikich Team