To maintain US payroll compliance, understand deductions

U.S. payroll legislation can get complicated. Most companies know the importance of maintaining U.S. payroll compliance, but may stumble when it comes to determining which payroll deduction laws apply to their employees. The fact that some deductions are mandatory while others are voluntary has the potential to further complicate matters. There are numerous different types of payroll deductions, including:

– Federal tax withholding
– State tax withholding
– Voluntary deductions
– Wage garnishment

Federal tax withholding
Federal employment tax laws mandate that employers deduct a portion of their workers’ earnings as Medicare tax, Social Security tax and federal income tax. The current U.S. payroll tax legislation gives taxpayers a 2 percent payroll tax cut, reducing the rate from 6.2 percent to 4.2 percent. For the average family, this represents a nearly $1,000 tax bill reduction, according to The Wall Street Journal. As The New York Times reported earlier this month, the chances of this allowance being extended into 2013 are slim, which means companies and employees alike should be prepared for the tax holiday to come to an end.

State tax withholding
The particulars of these deductions vary from state to state. This type of tax withholding may include:

– Income tax
– Local income tax (for instance, New York City’s income tax and Ohio’s school district tax)
– State disability insurance
– State unemployment tax

Some states, such as Arizona and Pennsylvania, ascribe to a flat percentage withholding method.

Voluntary deductions
Voluntary payroll deductions must be authorized by employees. They come in various forms, including:

– Insurance premiums (accident, disability, health, life, etc.)
– Retirement investment options, such as 401(k) contributions
– Union dues

Wage garnishments
Wage garnishments are court-ordered and require employers to withhold wages in conjunction with workers’ debts. A common type of wage garnishment is child support. Under Title III of the Consumer Credit Protection Act, “up to 50 percent of an employee’s disposable earnings (may) be garnished for child support if the employee is supporting a current spouse or child, who is not the subject of the support order, and up to 60 percent if the employee is not doing so. An additional five percent may be garnished for support payments over 12 weeks in arrears.”

Summary:

U.S. payroll legislation can get complicated, as there are different types of mandatory and voluntary deductions.

US payroll tax legislation and the impending fiscal cliff

For the 2011 and 2012 calendar years, taxpayers have enjoyed the benefits of U.S. payroll tax legislation that reduced the payroll tax to 4.2 percent from 6.2 percent—a decrease that translated into the average family’s tax bill being cut by nearly $1,000.

As the New York Times reported earlier this month, the chances of the U.S. payroll legislation being extended past the end of the year are unlikely for several reasons. Specifically, Treasury secretary Timothy Geithner stressed its temporary nature in front of the Senate Budget Committee, the White House has not indicated any plans to pursue a continuance and House Minority Leader Nancy Pelosi said she believed the tax cut should be allowed to expire, the news source reported.

Economic adviser supports payroll tax holiday extension
Lawrence Summers, former director of the National Economic Council under President Barack Obama, recently spoke out in support of an extension, citing benefits of the reduced rate, such as stimulating consumer spending and boosting the jobs market.

“This is not the right moment to repeal the payroll tax cut,” Summers told the Center for American Progress think tank. “It is $120 billion that enables cash-strapped families to spend money on what they need and provides incentives certainly for small businesses and perhaps beyond.”

If the reduced payroll tax rate is not extended into 2013, it will expire at the same time as a battalion of Bush-era tax cuts, a situation commonly referred to as the “fiscal cliff.”

“It is essential that we avoid falling over that cliff,” Summers said, as quoted by Reuters. Echoing other business experts, policymakers and think tanks—including the nonpartisan Congressional Budget Office—Summers warned that the combination of reduced government spending and higher taxes could have a dire effect on the country’s economic recovery efforts, and might even result in another recession. According to Politico, Michael Feroli, the chief U.S. economist for JPMorgan Chase, authored a report earlier this year that forecasted the nation’s economy would take a $125 billion hit next year if the tax break were allowed to expire.

Summary:

A former White House economic adviser recommended a U.S. payroll tax legislation extension to offset the effects of the impending fiscal cliff.

Future of US payroll tax legislation uncertain

Last December, following much discourse and dissension, Congress finally managed to hammer out a two-month extension of the U.S. payroll legislation that gave taxpayers a 2 percent payroll tax cut. The Temporary Payroll Tax Cut Continuation Act of 2011 was finalized just two days before the decreased rate was set to expire at the end of the year, which gave lawmakers time to formulate a more far-reaching U.S. payroll tax compliance agreement.

In February, an agreement was made to keep payroll taxes at the current 4.2 percent level on wages up to $110,100 through the end of 2012. As October commences and the leaves begin to turn—a sure sign that the end of the year is approaching—questions are being raised about whether another extension is in the offing, an idea most dismiss as unlikely.

U.S. payroll tax legislation extension unlikely
As The New York Times notes, Treasury secretary Timothy Geithner recently stressed the temporary nature of the U.S. payroll tax legislation while testifying before the Senate Budget Committee. Similarly, the White House has shown no indications that it is pushing for an extension, even as lawmakers begin to meet privately about tax extenders and the impending fiscal cliff, according to congressional aides cited by the National Journal Daily. Indeed, support for the continuation of the tax cut has grown tepid even among the Democrats who championed the bill’s initial passage, and House Minority Leader Nanci Pelosi has gone on record saying she believes the measure should be allowed to expire, the Times notes.

The news source offers a two-pronged explanation for the waning support of the payroll tax holiday.

“First, both Democrats and Republicans would rather focus on the broader political and economic issue of the fate of the Bush-era income tax cuts,” according to the media outlet. “Second, though the economy has not become significantly stronger over the past year … independent economists say that the economy could shoulder the payroll tax increase without undue harm.”

That said, an April report by Michael Feroli, the chief U.S. economist for JPMorgan Chase, estimated that ending the payroll tax holiday would result in a $125 billion hit to the economy in 2013, Politico notes. This, in conjunction with the expiration of the Bush-era rates and cuts to defense and domestic programs, could result in another recession, according to the nonpartisan Congressional Budget Office.

Summary:

The future of the U.S. payroll tax legislation that gave taxpayers a 2 percent payroll tax cut looks uncertain going into 2013.

The benefits of payroll software

Keeping up with frequently changing payroll legislation and maintaining compliance can be tricky for companies, particularly during tax season. Government reporting at the federal, state and local level is often dreaded by business owners, but payroll technology can make this unpopular task seem less intimidating.

“Tax calculations and printing of professional payslips will reduce a significant burden for small business owners and assist them to focus on managing costs and running their operations,” notes ITWeb.

Standard codes and reports
With payroll software such as Sage DacEasy Payroll, companies can rest assured that the handling of what is likely one of their largest expenses is being automated, helping ensure payroll compliance regulations are being upheld and reports are accurate and complete. For users’ convenience, Sage DacEasy Payroll includes standard codes (Hourly, Salary, Sick, Vacation, etc.), as well as common reports such as the Employee Vacation and Sick Time Report, Department Report and Transaction History. By using these reports, users can attain compliance with basic employment conditions pertaining to annual leave, sick leave, maternity leave and other allowances, and generate bonus, commission, sick or vacation pay either by itself or in conjunction with regular pay. Codes can be modified as necessary, and new ones can be added.

Analysis and forward-planning
Sage DacEasy Payroll also facilitates analysis and future planning by providing companies with instant access to earnings, deductions and liabilities information for the month, quarter, next quarter and year. Additionally, there is the option to create custom reports by using the DacAccess feature.

Comprehensive tracking
Successful payroll management is all about tracking, and payroll technology can facilitate detailed monitoring without the need to dedicate extensive resources to the task. Sage DacEasy Payroll provides the following tracking capabilities:

– 12 user-defined liabilities
– Up to 12 user-defined fields
– As many as 30 user-defined earnings and deductions

Automated calculations
For companies with different types of employees, payroll calculations have the tendency to get complicated. Payroll software can remove much of this confusion by separating hourly, salary and contract labor employees and calculating payroll in accordance with several different pay schedules, including weekly, biweekly, semimonthly and monthly.

Ultimately, payroll technology is a viable way of maximizing accuracy, expediting payroll processing and mitigating error while freeing up time for workers by reducing the need for manual involvement.

Summary:

Payroll software can help companies maximize accuracy, expedite payroll processes, mitigate error and free up workers’ time.

Michigan unions triumph against US payroll legislation

U.S. payroll legislation that prohibited the deduction of union dues from Michigan school employees’ paychecks was recently blocked by a U.S. District Court judge who said the law may be unconstitutional.

The bill to enact the U.S. payroll compliance change, PA 53, was signed into law by the state’s governor in March. Since then, it has been challenged twice. The latest argument is that it violates the 14th Amendment by treating school employees differently than other workers for no reason, The Detroit News reports.

“PA 53 singled out school employees for retaliation and does absolutely nothing to improve education for Michigan students,” said David Hecker, president of AFT Michigan, the state affiliate of the American Federation of Teachers. Hecker called the law “unfair and punitive,” as quoted by the news source.

As the Detroit Free Press notes, similar laws in other states have also been challenged in court. Earlier this year, a federal judge ruled that comparable legislation in Wisconsin violated workers’ First Amendment rights.

What will happen when 2012 US payroll legislation expires?

Unless Congress elects to extend U.S. payroll tax legislation that increased paychecks for workers through the end of the year, take-home pay will decrease beginning in January 2013.

The U.S. payroll legislation went into effect last year and was extended through the end of 2012 in February, following the 11th-hour passage of the two-month Temporary Payroll Tax Cut Continuation Act of 2011 just eight days before the expiration date of last year’s provisions. It set the payroll tax rate at 4.2 percent – a 2 percent decrease from the original 6.2 percent.

CNNMoney recently put the effect the cut has had on workers into perspective.

“A person making $50,000 has enjoyed roughly $83 extra a month, while someone making $110,100 has been taking home an extra $183.50 a month,” the news source explained.

If the scheduled expiration comes to pass, federal revenue will increase by an estimated $95 billion in 2013, according to projections from the Congressional Budget Office.

Maintain US payroll compliance this July 4

Independence Day falls on a Wednesday this year, which means many workers will be looking to take two days off either before or after the holiday, thereby giving themselves a long weekend.

What does this mean in terms of U.S. payroll legislation? As Business Management Daily notes, many companies make the mistake of including
vacation pay or holiday pay in employees’ regular rates when it comes to calculating overtime. In fact, vacation pay and holiday pay are categorized as
compensation for idle time and should not be included in the regular rate calculation.

The news source also notes that there is no federal or state U.S. payroll compliance law that requires employers to pay their workers for vacations or holidays. Indeed, according to the Department of Labor, any compensation that is provided is “generally a matter of agreement between an employer and an employee (or the employee’s representative).”

That said, there are exceptions for government contracts to which the labor standards of the McNamara O’Hara Service Contract Act and the Davis-Bacon and Related Acts apply.

For the full Business Management Daily article, click here.

Congress to vote on Buffett Rule following successful passage of US payroll legislation

In his latest weekly address, U.S. President Barack Obama announced that Congress will be voting on the Buffett Rule, which would tax the wealthy more heavily while preserving current tax rates for middle and working class citizens.

“I think asking a billionaire to pay at least the same tax rate as his secretary is just common sense,” said the president, in reference to the fact that billionaire Warren Buffett – after whom the proposed legislation is named – has a secretary who pays a lower tax rate than he does.

He added that if Congress continues to pass tax breaks for the country’s richest citizens, “Families who are scraping by will have to do more because the richest Americans are doing less.”

Even with U.S. payroll tax legislation passed in February that extended the 2 percent payroll tax cut through the end of 2012, many Americans still have concerns about how they will make ends meet – especially in regard to rising gas prices.

“When prices spike … that gas spike feels like a tax hike coming right out of your pocket,” said President Obama during a recent speaking engagement at Ohio State University.

Put savings from US payroll legislation toward retirement, company advises

After much deliberation, Congress was finally able to pass U.S. payroll tax legislation last month to extend the 2 percent payroll tax cut through the end of 2012.

Retirement plan provider The Hartford is advising taxpayers to take the money they save thanks to the U.S. payroll legislation and invest it into retirement plans, Financial Advisor Magazine reports. According to figures from the company’s Two for Tomorrow campaign, the extra 2 percent contribution can mean an additional $83,000 in a retirement account over 30 years if the person earns $50,000 a year.

“This is a way to increase the contribution amount without feeling a loss,” said Dana McCullough, assistant vice president at The Hartford, manager
of participant education and the director for the campaign, as quoted by the news source.

In a statement, The Hartford’s vice president and national retirement spokesperson, E. Thomas Foster, Jr., called the practice “a painless way to enhance retirement savings and help build a more secure financial future.”

Pension-related US payroll legislation ruled unconstitutional by Florida judge

A Florida judge recently ruled that U.S. payroll legislation requiring public employees to contribute 3 percent of their pay toward their pensions was unconstitutional.

According to circuit judge Jackie Fulford’s ruling, the rights of public employees – including police officers and teachers – as guaranteed under the Florida Constitution were violated by the U.S. payroll compliance measure.

Florida Governor Rick Scott spoke out against the ruling, calling it “another example of a court substituting its own policy preferences for those of the Legislature” and announcing his intention of filing an appeal.

Several unions, including the Florida Education Association (FEA) and the Federation of Public Employees, expressed their support for the decision.

“We once again find out that the Florida Legislature and the governor have overstepped their bounds by avoiding the constitution,” said FEA president Andy Ford, as quoted by the Miami Herald.