Now that all the fun and excitement of the election is over, the powers in Washington are rolling towards the “fiscal cliff” of tax increases and budget cuts. In case you haven’t been paying attention, over the summer there was much debate about allowing the debt “to boldly go where no debt has gone before.” The debate continued through the election and both parties engaged in a high stakes game of chicken. Each betting the scales would tip in their party’s favor giving them a mandate to shape the world in their vision.

Clearly, this didn’t happen. So, now the politicians have a few weeks to reach agreement on what they couldn’t do in months. Failure to do so will result in breathtaking tax increases and spending cuts. Forecasting the effect on the economy is something keeping economists busy on the talk show circuit. While the effect on payroll administrators, accountants,  HR managers and payroll software providers like us is best described as “frustrating”.

Since cliff diving is currently the law of the land,  we have no choice but to roll back to the tax rates prior to the Economic Growth and Tax Relief Reconciliation Act of 2001.  Here’s some information from AICPA.

This is frustrating because we KNOW  the rates will change. Everyone seems to agree that going off the fiscal cliff is a bad idea, so I expect we’ll see some type of workaround.  However, if history is a guide, we will not see changes to the rates until sometime in January, retroactive to January 1st.

This means employers across the country will likely run their first few payrolls of the year with the “wrong” rates and will have to make corrections once the revised rates are available. For state and federal taxes you should remember this is an estimate only, and it’s up to the employee to square the account with the government at the end of the year. In the event that taxes go UP for some employees, and you are compelled to withhold more, there is a provision in the software to withhold additional money on a payroll. This is a manual process, and the amount needs to be calculated and set up employee by employee.

If it’s less and you want to refund the money,  it will require you to make a manual calculation and adjustment for each employee. No matter how much the difference, it’s a lot of work for what historically has been less than a few dollars difference in pay.

Social Security taxes have a different tale to tell. Since this isn’t our first rodeo with Social Security rates, we have a mechanism built into our software to automatically collect more or refund excess withholding.  You can adjust the Social Security rate anytime without waiting for an update.

Medicare is a different creature. There are going to be changes to Medicare due to the 2010 health-care law. But, if there are changes beyond that you may have to go down the path of manual adjustment.

Sage will be keeping a close eye on all these developments. Please understand if the government makes a change at midnight it isn’t going to be in the software at 6 am. It takes a while to code, test and deliver the changes to you. So, have patience with the software and understand this is going to require additional work.

If you’re as thrilled about all of this as I am,  write your representative and let them know.

DSC_5179Blog and photo from:
Tom Tweedle
Sr. Customer Support Analyst
Sage Nonprofit