Payroll Paralysis: Don't Panic!

One of the consequences of relegating the Bush tax cuts to a postelection limbo is widespread confusion about what exactly is supposed to happen about paycheck withholding. The confusion isn't limited to employers wondering what to tell their worried workers. Last week, BusinessWeek published an article on “paycheck anxiety” together with a calculator showing the effect of a reversion to 2000 rates and was promptly taken to task by the Tax Foundation in a blog post that described the magazine's estimates as “way too high” — more than four times the actual increases, in some cases.

The BusinessWeek article also quotes a payroll manager at New York University who says that he's been doing payroll for close to 30 years, and “never have we seen something like this where it gets that down to the wire. That's what's got a lot of people nervous.”

But that nervousness may be misplaced. In fact, a similar situation arose about 10 years ago, and also in 1992, according to John W. Strzelecki, senior payroll analyst with tax and business information provider CCH, a Wolters Kluwer company. In late 2000 there was uncertainty about whether the Bush tax cuts would pass, and the IRS responded by issuing two sets of withholding tables: one set while the legislation was still up in the air, based on the higher tax rates; and a second set after the legislation passed, which took into account any earlier overwithholding. Similarly, in 1992, the IRS issued tables effective January 1, and a second set effective March 1. “In addition, over the years many states have reissued withholding tables midyear,” Strzelecki notes.

Strzelecki expects the IRS to issue the tables for 2011 later this month. For now, there's not much that companies can do except sit tight. “Paychecks will remain the same until the end of the year, for sure,” he points out. “The real action will come between November 15, when Congress comes back, and the date they adjourn for Thanksgiving, and then when they return in December. The IRS usually issues withholding tables around Thanksgiving.”

The consensus in the payroll industry is that it takes 2 to 4 weeks to implement and test withholding changes, Strzelecki adds. If the IRS repeats its two-part strategy of 10 years ago, payroll departments might expect to get busy at the beginning of the New Year, implementing new employee Form W-4s and answering inquiries about reduced paycheck amounts.

CCH offers some examples of projected withholding amounts for 2011 here. ###

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