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Payroll Withholding Rates In Limbo Until Congress Acts

Taxpayers everywhere would like to know what Congress will do about the Bush-era tax cuts. With the tax cuts due to expire, tax rates could change dramatically - or not at all. No one is more concerned than payroll managers, who do not know at what rate taxes should be withheld from employees' wages.

Orange County tax attorneys note that under normal circumstances, payroll managers would set withholding rates in mid-November, based on new withholding tables from the Internal Revenue Service. This year, though, the IRS has not issued the tables. They are sitting tight, waiting like the rest of us to find out what the tax rates will be.

Employers need some time to alter tax withholding rates in payroll systems. Without knowing what the rates will be in 2011, employers may not have enough time to set withholding properly in the first paychecks of the year.

If Congress waits until the new year to make a decision on tax rates, it will create an even bigger problem, because withholding will have to be calculated retroactively.

Congress is not planning to take up taxes as its first priority when it returns from the Thanksgiving break on Monday. First they will look at a food safety bill, then a bill to keep the government running.

The President and most Democrats want to renew the Bush-era tax cuts for only the first $200,000 of an individual's income. They would let the Bush tax cuts for income above that amount expire. Republicans want to extend the tax cuts for all income brackets.

In the uncertain situation, the IRS will probably prepare several sets of tables to be ready for the most likely compromises.

What payroll managers do not want is to revert withholding to pre-Bush-cut rates, then adjust the withholding again if Congress renews some or all of the Bush cuts. And, of course, all of this would happen at year's end, when payroll managers are finishing out the old year and issuing employees' W-2s.

Source: Reuters "Analysis: IRS holds key to preventing tax hikes on Jan 1" 11/23/2010

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