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Payroll Confusion: Adjusting for Expiring Bush-Era Tax Cuts
Workers might see larger tax withholding beginning Jan. 1, 2011, even if tax rates are extended

By Stephen Miller  11/2/2010
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The Bush-era tax cuts are set to expire at the close of 2010. While Congress could pass a partial or full extension before year-end 2010, U.S. employers must adjust their payroll deduction systems for 2011 well before the end of 2010. That could mean setting their payroll systems to anticipate no extension; then if Congress acts, they would need to readjust these systems again in 2011.

Setting payroll systems to reflect the higher tax rates that were in effect a decade ago will mean more money being withheld from workers' paychecks, according to CCH, a provider of employment and payroll law information and software. And that will present a communications challenge for employers.

Change, and Change Again

“The tax cuts—now known as the ‘Bush tax cuts’—were signed on June 7, 2001," noted John W. Strzelecki, senior payroll analyst at CCH, which is part of Wolters Kluwer Law & Business. "The IRS then issued new withholding tables, effective July 1, 2001, that incorporated the new tax cuts. In addition, the new tables took into account the fact that too much money was taken from paychecks that were issued in the first half of the year.”

Strzelecki foresees a similar pattern this time, with the Internal Revenue Service (IRS) issuing tax withholding tables for 2011 in November 2010 and subsequently issuing revised tables if Congress extends the Bush-era tax rates. "If the tax cuts are passed and signed, the IRS will revise the withholding tables with an effective date that allows just enough time for the payroll industry to implement the changes, just as in June 2001," Strzelecki said. "The tables will take into account the fact that too much money was withheld from the paychecks that were issued prior to the tax cuts, also just like in 2001," he explained.

“What it all boils down to is workers will see less take-home pay beginning in 2011 and more take-home pay later in the year, just as we saw in 2001,” said Strzelecki.

For employers, this highlights the importance of keeping employees informed of why their tax withholding will be higher, at least initially—even if Congress should act before the end of 2010.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Planning for the Expiring Bush Tax Cuts: Here Today, Gone Tomorrow, SHRM Online Legal Issues, October 2010

Expiring Bush Tax Cuts Could Accelerate Executive Comp Payments in 2010, SHRM Online Benefits Discipline, updated September 2010

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