The Fiscal Cliff: What is it and how will it affect your business?

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Fiscal Cliff

Updated 1/3/2013

  • The American Taxpayer Relief Act of 2012 continues the lower "Bush era" income tax rates for individuals earning up to $400,000 and households earning up to $450,000. The tax rate for earnings in excess of those thresholds will now increase from 35 percent to 39.6 percent.
  • The new tax tables reflecting the rate changes implemented by the Act were released by the IRS on January 3, 2013. Paychex has implemented these changes, and they are reflected in our clients' payrolls as of January 4, 2013.
  • The higher Social Security tax rate has already been calculated into the payrolls of Paychex clients as of January 1, 2013 and will be reflected in the first paychecks of the New Year.

Fiscal Cliff Update

The media term, "Fiscal Cliff," refers to the unprecedented convergence of several major events at the end of 2012 which could have impacted virtually all businesses and had broader economic implications for the nation. The payroll tax holiday of a two-percent reduction in the employee Social Security payroll tax was set to expire, as well as the lower "Bush-era" federal income tax rates. In addition, there were automatic cuts to federal spending and changes to several popular tax credits. Since these tax laws were negotiated into the New Year, employers had a particularly daunting task of properly assessing and withholding their employees' federal income tax and the employees' Social Security portion of FICA payroll tax.

How does this affect my payroll through Paychex?

While the government negotiations regarding aspects of the Fiscal Cliff have presented uncertainty into the New Year, what is certain is that all Paychex Payroll clients have their payroll taxes monitored and properly addressed to comply with 2013 tax laws.

On January 2, 2013, the American Taxpayer Relief Act of 2012, which averts certain aspects of the Fiscal Cliff, was signed into law by President Obama.

Key highlights for Paychex clients include the following:

  • The Act continues the lower "Bush era" income tax rates for individuals earning up to $400,000 and households earning up to $450,000. The tax rate for earnings in excess of those thresholds will now increase from 35 percent to 39.6 percent. The new tax tables reflecting the rate changes implemented by the Act were released by the IRS on January 3, 2013. Paychex has implemented these changes, and they are reflected in our clients' payrolls as of January 4, 2013.
  • The Act does not extend the 'payroll tax holiday', so the employee Social Security tax rate will go from 4.2 percent back to 6.2 percent up to the 2013 taxable wage limit of $113,700. As a result, a worker earning $50,000 per year will now see $1,000 less in their net take-home pay as compared to 2012. The higher Social Security tax rate has already been calculated into the payrolls of Paychex clients as of January 1, 2013 and will be reflected in the first paychecks of the New Year.

As other changes in tax law may be negotiated, Paychex has a dedicated team of tax and payroll professionals who closely monitor every development, as well as an IT staff ready to quickly update our systems and tax tables.

2013 at a Glance

With all the challenges as a business owner, we don't believe monitoring and calculating payroll changes related to the Fiscal Cliff should be one of them. We also encourage you to bookmark this article and check back periodically for updates. To understand other issues that could affect your business, please read, "The Paychex Top 13 in '13: Potential Regulatory Changes Every Small Business Needs to Know About in the New Year."

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