Last week, Congress approved a two-month extension to the Temporary Payroll Tax Cut Continuation Act of 2011. The extension continues the reduction of employees' Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through the end of February 2012.
For employees, it was moderately good news: a guaranteed extra few dollars in their paychecks.
But small business owners, accountants, and some politicians say the two-month extension may have done more damage than good because they now don't know if the tax cut will extend beyond February, and the lack of certainty, like all economic policy, makes it hard to plan out financial (and hiring) decisions for the year ahead. Congress will vote again on the cut in 2012, and it could be extended—or it might not be.
Gary Desilets, president of Deckscapes of Virginia in Manassas, told The Washington Post, "How do I plan for two to three years down the road when I have an economic policy that’s short term? I've had to ignore the policies and just hope for the best."
Accountants are shaking their heads. Paul Herman, a CPA and president of Herman & Company CPA's in White Plains, New York, says the extended payroll tax cut "will definitely cause a headache for small business accountants."
Kimberly Fourman, a CPA with Loggins & Associates, an accounting firm in Jonesboro, Georgia, explains one potential logistical hiccup of the extension. This week, she ran the 1/1/2012 payroll for one of her clients using QuickBooks, one of the most popular tax software for small business accounting. Even though Fourman had the most recent update installed, QuickBooks determined the payroll taxes incorrectly. It pegged them at 6.2 percent for the employee portion instead of 4.2 percent.
"I just happened to catch it because I knew to look for it," she says. "How many bookkeepers for small businesses around the country have already ran their 1/1/2012 payroll incorrectly? They will have to amend the paychecks, or withhold even less on the next payroll check in order to make up for too much taken out for the incorrect payroll."
San Diego State University accounting professor, Dr. Nathan Oestreich says that the harsh effects on those who process payrolls—the on again, off again, no accurate forms, and potential penalties make the two-month extension a logistical nightmare.
"The burden on small businesses will be enormous," he says. "One needs to ask whether the toll on these people can be justified."
Small business owners and politicians also point to larger payroll tax issues underscored by the short-term extension.
At a press conference late last week, House Speaker John Boehner said that "a two-month extension only perpetuates the uncertainty that too many employers already have in dealing with the economy and what's coming out of Washington."
He added: "The paper work requirement and programming requirement will make it virtually impossible for those who provide payroll services to do the job their employers hired them to do…The fact is, we can do better."
Tim Reynolds, who owns Tribute Inc., a software development firm in Hudson, Ohio, agrees with Boehner, telling Marketplace.org that the extension is another "example of the uncertainty that Congress in general, and for that matter, the administration has created over the last several years. I think that he's right that a two-month extension is essentially meaningless, both to employees and to employers."
And Zalmi Duchman owner and CEO of The Fresh Diet, an Inc. 500 company based in Surfside, Florida with nearly $20 million in annual revenue in 2010, said he was most bothered that the extension leaves out any tax cuts that would help business owners. He says that an employer tax credit, which was tabled by the Senate early on in the negotiations, would have saved his business nearly $4,000 a month or $50,000 a year.
"That would motivate us to hire more people," he says.
Mark Stevens, CEO of MSCO, a marketing and consulting firm in Rye Brook, New York, notes that tax breaks are always welcome to small business owners. The problem is, he says, is that a modest payroll tax cut—and a temporary one at that—doesn't even register on the Richter scale.
"Small business is vastly over-taxed and over-regulated," he says. "This new payroll cut is a political device designed by bureaucrats not businesspeople. What would be significant is a dollar-for-dollar tax credit for every unemployed person small business hires. That would provide great talent for entrepreneurial companies and would eliminate unemployment overnight. This silly 'cut' now in the news is a beltway joke."