The payroll tax increase in your first January paycheck is just the beginning.
With congressional and White House officials working through the last day of 2012 on a compromise to avoid the fiscal cliff, employers and payroll processors headed into the new year not knowing how much to hold back from employees' paychecks for federal income taxes.
And workers were left wondering what they'll have left to spend and save.
Mary Berg, a Bellevue dental assistant, has been anxiously watching news accounts of the ramifications of the fiscal cliff, shorthand for automatic tax increases and spending cuts.
While she's not yet calculated how different scenarios might affect her family (she has one teenage son at home and another son in college in Texas), Berg knows she'll feel a squeeze from any smaller paycheck.
“It's like, how much more can we cut? The cost of living keeps going up, and we keep getting less take-home pay,” she said.
Several local businesses and payroll firms said they planned to process paychecks with an increase in Social Security taxes but use 2012's lower federal income tax withholding schedule until the IRS tells them otherwise.
ConAgra Foods said in a statement that the company “is allowing the Social Security payroll tax to revert to the 6.2 percent level, but is not making any changes in federal income tax withholding because the IRS has not yet issued new guidance.”
That's a common practice, said Michael O'Toole of the American Payroll Association.
The Social Security tax rate was temporarily lowered to 4.2 percent in 2011 in hopes that more take-home pay would lead to more consumer spending and boost a slowly recovering economy. The tax cut applies to the first $113,700 in annual pay and expired at the end of 2012.
That will mean about $38 less per biweekly paycheck for a person earning $50,000.
No one expects the payroll tax cut to be extended.
Other tax increases are on the table, however. Those could come later and be taken out of paychecks retroactively over the rest of the year, said Joan Hemenway, vice president of operations at Hemenway Associates tax and payroll firm in Omaha.
“We'd end up having to average it out over the year,” she said.
If Congress did nothing, taxes would rise in 2013 by an average of $2,400 for an average family of four with income between $50,000 and $75,000, according to an estimate by the nonpartisan Tax Policy Center in Washington.
A compromise, of course, could alter those figures.
Local paycheck processing firms said that despite all the media coverage, they expect some of their clients' employees will be surprised to see less money in their paychecks.
“I'm sure we'll probably get a few phone calls this week,” said Eugene Applegate, vice president at Payroll Express in Omaha, which handles payroll for small businesses. “It doesn't hit them until they actually see it.”
Jean Hanson, enrolled agent at Hemenway Associates, said the 2 percentage point loss can be substantial for people “living paycheck to paycheck.”
If a deal between Congress and the White House comes undone, income tax rates would go up, estate taxes and investment taxes would rise and the alternative minimum tax would hit millions of middle-income people.
In addition, dozens of other tax benefits for businesses and individuals that are routinely renewed each year expired at the end of 2011 and Congress was expected to renew many of them by January so taxpayers could claim them on 2012 tax returns.
If Congress didn't act, businesses would lose a popular tax credit for research and development as well as generous tax benefits for investing in new plants and equipment. Individuals would lose federal tax benefits for paying local sales taxes, buying energy efficient appliances and using mass transit. A credit for college tuition would be reduced and limited to two years instead of four.
In all, tax collections would go up by about $536 billion in 2013.
With an agreement, payroll processors said changes should be quick to calculate once the IRS issues new rules. Software providers would issue an update, and processors would run some test samples to ensure the changes were made correctly.
But guidance has been hard to come by.
“We had gotten an email from the IRS last week, saying even they are not sure what is going to happen,” Applegate said.
The IRS said in a December statement: “We are aware that employers have questions with respect to 2013 withholding. 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.”
The uncertainty is hard for businesses, said Joe Sova, president of Ideal Payroll Service in Omaha. “If the IRS is waiting, you know everybody else is waiting.”
Omaha-based West Corp., which employs about 34,000, said it issued paychecks Friday, and with a week and a half until the next payday, the technology communications firm is hopeful that more would be known before then, a spokesman said.
Small businesses are following the advice of their accountants or software firms. Though they've raised the Social Security payroll tax, they're sticking to 2012 income tax withholding amounts.
“We do all of our payroll through QuickBooks Online, but what QuickBooks is doing is leaving the withholding the same as it is now,” said Dave Sipherd, owner of Pets-R-Us at 10912 Elm St. The store, which sells pet supplies and small animals, employs 15 workers.
“But what will happen if taxes go up is that employees could end up owing money,” he said.
Tim Carlson, owner of Commercial Optical at 513 S. 13th St., said he, too, is sticking to the 2012 rules. “It's just me and my doctor,” said Carlson, whose store sells glasses and contact lenses and provides eye examinations.
Carlson said he has experienced tax adjustments in the 16 years he's been in business, but if this increase in the federal income tax comes to pass, “It's going to be different. It's going to affect more people.”
World-Herald staff writers Cindy Gonzalez and Janice Podsada contributed to this report, which includes material from the Associated Press.
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