Prepare now for the ‘fiscal cliff’ that looms Jan. 1

August 27, 2012

Unless Congress acts soon, the end of this year will see the expiration of an unprecedented number of tax provisions. That could cause havoc with your Payroll operations, as the IRS will be forced to delay issuing the 2013 tax tables and, critically, the 2013 withholding tables.

Bottom line: Prepare now to deal with last-minute changes to the tax code. Barring congressional action, here’s what to expect on Jan.1, 2013:

Tax rates

All income tax rates would revert to what they were in 2001. The 10% tax rate would expire, and the tax rates—currently set at 25%, 28%, 33% and 35%—would increase to 28%, 31%, 36% and 39.6%. Key payroll rates: The 25% flat supplemental withholding rate and the 28% backup withholding rate would increase to 28% and 31%, respectively.

The 4.2% Social Security tax rate would return to 6.2%.

The overall limitation on itemized deductions and the phase-out of personal exemptions would be reinstated. The doubling of the standard deduction for joint filers would also expire.

Employer-provided educational assistance

Under Section 127, you can subsidize employees’ educational expenses, up to $5,250 a year. Wrinkle: Before 2001, Section 127 wasn’t a permanent part of the tax code; it expired periodically. More important, prior to 2001, it didn’t apply to graduate education.

Suggestion: You could continue to administer your Section 127 educational assistance plan with the presumption that Congress will extend it, if not permanently, then at least on its old expire-and-reenact schedule. However, until the status of graduate education is settled, it would probably be prudent to limit outlays to undergraduate education.

Should Section 127 expire permanently, you can still reimburse employees’ educational expenses as a working condition fringe benefit. Even better: You can reimburse 100% of those expenses, with no $5,250 limit.

Catch: Employees’ education must be job-related—education that maintains or improves employees’ current skills, without qualifying them for new jobs.

Even bigger catch: You can’t reimburse employees tax-free if the education allows them to meet the minimum requirements of their current jobs or qualifies them for new jobs, even if the education maintains or improves skills currently required in your business. Job-related education also includes education that’s required by law or by you.

Upshot: You can send employees to seminars, but you can’t reimburse them tax-free for their undergraduate education.