Fiscal Cliff Watch: The clock is ticking, and still no withholding tables

December 12, 2012

Negotiations to resolve the “fiscal cliff”—a package of tax increases and spending cuts—that will kick in on Jan. 1, 2013, are taking place at an excruciatingly slow pace. Obama administration officlals and House Republicans have stepped up the pace of closed-door negotiations to resolve the impasse, but there’s still no legislative package for Congress to vote on and no bill for the President to sign. That must happen by midnight New Year’s Eve in order to avert the fiscal cliff plunge.

Unfortunately, six key pieces of payroll information are caught up in the fracas: the 2013 withholding tables, the 2013 withholding allowance amounts, the 2013 Form W-4, the extension of the 4.2% employee Social Security tax rate, the supplemental withholding rate and the back-up withholding rate.

Without those figures, Payroll can’t begin implementing plans for 2013 operations.

Under tax code Section 3402(a)(1), the Secretary of the Treasury must issue withholding tables that provide for the collection of taxes at a level that the secretary deems appropriate. As a result of this discretionary statutory authority, the IRS can temporarily freeze the withholding rates until Congress and the Obama administration resolve their differences.

While that may give Payroll departments a little breathing room right now, new withholding tables would need to be issued in the event no compromise was reached or an eventual compromise raises some tax rates, but not others. Payroll departments, therefore, may find themselves reprogramming their systems multiple times.

So far, the IRS hasn’t indicated what it’s intending to do. Warning: The tax code doesn’t give the secretary similar authority to extend the 4.2% employee Social Security tax rate.

According to recent press reports, the fiscal cliff may be resolved sometime between Christmas and New Year’s. If the IRS releases the 2013 withholding tables during that week, it’s possible that it may also provide some transition relief to employers that, due to the short turn-around time, couldn’t put the 2013 tables into effect with the first paycheck of 2013. However, as yet there’s no word on transition relief from the IRS.

Check for the final figures–whenever they become available.