Payroll Executives Complain About Lawmakers' Penchant for Brief Fixes

The battle over extending a payroll-tax holiday is creating headaches for businesses, and highlights Washington's growing penchant for short-term fixes in tax policy.

On Wednesday, with expiration looming for the payroll-tax cut, House Republicans remained opposed to a bill passed by the Senate to extend it for two months. The fix was designed to give lawmakers more time to work out a deal to extend the measures for the rest of the coming year in a way that would avoid adding to future budget deficits.

The current battle over extending the payroll tax cut is creating headaches for businesses and the IRS, John McKinnon reports on the News Hub. Photo: AP.

If the two-month extension passes, it would mark one of the briefest tax measures yet, accelerating the recent trend in Congress toward last-minute brinkmanship and short-term compromises on taxes. The payroll-tax break was originally passed in December 2010 to provide a one-year boost to the ailing economy. It was part of a package that also extended for two years the Bush-era tax cuts, which were adopted beginning in 2001.

Payroll executives complain that the two-month extension would pose problems for them to manage, even if it's followed by a full-year extension.

"With the first of January now only two weeks away and payroll departments trying to meet year-end compliance mandates and reconciliation, there simply is insufficient time to implement this major change in withholding requirements," according to a letter to lawmakers this week from the National Payroll Reporting Consortium, a trade group.

The Obama administration, which supports the two-month extension as a stopgap measure, has argued that the changes are not difficult to administer. "While any short-term extension is bound to create some administrative complications, it is feasible to implement the bipartisan Senate bill," Jenni LeCompte, the Treasury's assistant secretary for public affairs, said this week.

The two-month extension would continue a two-percentage-point reduction in the 6.2% tax that employees normally pay for Social Security. The maximum amount of wages subject to the tax for 2012 is $110,100. One major concern for many lawmakers was designing the measure so that better-paid employees—who would hit the annual earnings ceiling more quickly than other workers—don't receive a disproportionate share of their tax break, in case the break isn't extended beyond February.

To do that, though, the Senate bill would require extensive new record-keeping, and multiple calculations of employees' wages, payroll officials say. That could make the adjustments more cumbersome than those that followed the December 2010 legislation.

"If they pass the two-month extension, it's worse than last year for payroll administration, definitely," said Mike O'Toole, senior director of government relations for the American Payroll Association, a professional group.

Earlier this year, uncertainty over tax rules caused the Internal Revenue Service to delay processing returns for several million taxpayers until mid-February. The IRS needed the extra time to accommodate last-minute extensions of several expiring deductions by Congress in December 2010.

The two-month extension could increase tax-compliance costs for small firms, which already pay proportionately more than large businesses to comply with tax rules, said Kevan Chapman, a spokesman for the National Federation of Independent Business, a small-business group. Particularly for small firms that do their own taxes or rely on software, "it's just going to be very complicated," he said.

Small businesses also worry that several other narrowly targeted short-term business tax breaks won't be included in final package this year, said Molly Brogan, vice president for public affairs of the National Small Business Association.

Tax experts and business advocates said the latest twists and turns create additional economic uncertainty for next year, hurting businesses' ability to plan and invest.

The Obama administration's top economist countered Wednesday that the aftermath of the financial crisis and pressure on the middle class remain the biggest problems for the economy. It's "not uncertainty about economic policies, taxes or regulations," said Alan Krueger, the chairman of the White House Council of Economic Advisers, in a speech in Charlotte, N.C.