Five Things about the Payroll Tax Cut Extension

by | IRS 940/941 Information

Good grief. What a mess.

Just hours before the Christmas holiday weekend, Congress reached agreement on a two month (that’s right!) extension of the temporary payroll tax cut enacted for the 2011 tax year. The deal keeps the rate at 4.2%, instead of reverting to the 6.2% rate in effect prior to the cut. The bill also extended emergency federal unemployment benefits by two months, and delayed payment reductions to doctors treating Medicare patients.

None of this makes running your company any easier. Uncertainty – and this action comes loaded-down with it – is stifling for business. Congress will take up the matter again when it reconvenes in January, but in the meantime here are five points for you to consider regarding the two month extension.

1. It’s simpleminded.

What rational government body institutes a two month tax policy of any sort? Can your business make hiring, purchasing, or expansion decisions based on a two month horizon?

One of the biggest complaints the private sector community directs at the current Washington power structure is that tax and regulatory policies have become political footballs, punted in one direction or another in order to score points with a particular constituency. But the cost of appeasement is that your business must now plan for two-thirds of one-quarter, then (perhaps?) budget for a higher payroll tax for the remainder of the year.

2. It presents logistical problems.

Most companies do not have systems in place that can easily make adjustments arbitrarily. In mid-December, Peter Isberg of the non-partisan, policy-neutral National Payroll Reporting Consortium wrote to key members of the appropriate Congressional committees, stating that “many payroll systems are not likely to be able to make such a substantial programming change before January or even February. The systems affected tend to be highly complex, normally requiring at least ninety days for a change of this magnitude for software testing alone…”

Isberg expressed serious concerns pertaining to the plan’s “substantial problems, confusion and costs.” He suggested, among other possibilities, making the 4.2% rate effective through the entire first quarter of 2012, but his recommendations were ignored.

3. It’s potentially a morale killer.

Its various complications and problems aside, the cut does add significantly to the take-home pay of many employees. For a $50,000 a year worker, the reduced rate means an extra $40 per paycheck, or an extra $1000 a year. Your average employee could be taking home $80 less a month, starting in March. It won’t be your fault, but you’ll have an unhappy staff on your hands.

4. It ignores reality.

Federal spending is embarrassingly out of control, the country’s debt has skyrocketed, and Social Security is underfunded. Certainly the spending side of the equation needs scrutiny, but at some point the debts need to be paid. An extension of the payroll tax cut is akin to kicking the can down the road. A reality check is in order, but that’s rare in Washington.

5. It sets the table for more of the same.

Sadly, the partisan bickering on display late in the year may be nothing compared to what could be in store for 2012. Election years are always rife with uncertainty. Throw in a weak economic recovery, a possible shift in power in the Senate, and an incumbent president whose re-election appears to be a coin-flip at this point and you have a recipe for non-stop political grandstanding. Look for Obama to try to wrest the tax issue from Republicans, using the payroll tax for leverage…and the cycle of uncertainty for businesses continues.

Partnering with MP Star Financial can bring peace of mind and allow you to concentrate on running and growing your company.

Call MP Star Financial today at (800) 833-3765 extension 150. Learn how to navigate periods of uncertainty with proven, reliable cash flow management and business funding strategies.

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