As an HR Professional or employer, you may be watching the news and wondering how the “Fiscal Cliff” may affect your business. The term “fiscal cliff” describes a package of significant U.S. federal tax increases and spending cuts that are due to take effect in late 2012/early 2013. These measures are designed to reduce the federal budget deficit by $503 billion by the end of FY13. Although reducing the deficit is a high priority, the timing for these measures could not be worse. In the midst of a still uncertain economic recovery, many economists and political pundits believe that such significant tax hikes and budget cuts could cause a double-dip recession and a spike in unemployment in 2013.
The budget cuts are focused on the Defense Department as well as “discretionary” programs, which means that there could be cuts in U.S. infrastructure, schools, public health and homeland security programs. Social Security, Medicaid, supplemental security income, refundable tax credits, the children’s health insurance program, the food stamp program and veterans’ benefits are exempt from the planned budget cuts. In combination with impending tax increases, including the new Obamacare health care taxes, U.S. businesses could be on the precipice of an economic disaster.
Small businesses would be among the hardest hit, and according to a new survey by Wells Fargo and Gallup, small business owners are preparing for the worst. In fact, more than 20% of small business owners said they planned to reduce the size of their work force over the next 12 months. In addition to possible layoffs, many questions are waiting to be answered regarding employee benefits and taxes.
While Washington grapples with a plan to prevent the U.S. from going over the fiscal cliff, employers, HR and benefits professionals can prepare now for several potential changes in 2013.
Expiration of the payroll tax cuts
On December 31, 2012, the Bush-era tax cuts are set to expire, which will bring the tax system back to 2001 levels. At the same time, President Obama’s temporary 2% payroll tax cut will expire, which lowered employees’ Social Security payroll taxes. If these tax cuts expire as planned, the average U.S. family of four earning $50,000 will see taxes increase by $1,040 a year. Although the increase is on employee contributions, it also affects an employer’s withholding obligations.
Similarly, a new 0.9% Medicare payroll tax increase applies (from 1.45% to 2.35%) under the Patient Protection and Affordable Care Act (PPACA) on wages over $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers. Like the 2% payroll tax increase, the Medicare payroll tax increase is not an employer liability, but employers must be prepared to withhold the additional 0.9% from wages for any employee with wages over $200,000.
Another Bush tax cut set to expire at the end of 2012 is a one-time adoption tax credit that gave $12,650 in 2012 for expenses related to the adoption or attempted adoption of a child. Qualified adoption expenses include reasonable and necessary adoption fees, including court costs, attorney fees, traveling expenses and other direct adoption-related expenses. Unless Congress acts to extend this tax credit, beginning on Jan. 1, 2013, only parents who adopt special needs children from within the United States will be eligible for a $6,000 tax credit.
Flexible spending account contributions
Under the health care reform bill, flexible spending account (FSA) levels will be reduced to $2,500 per year for plan years beginning in 2013. At the same time, the threshold for claiming medical deductions will be increased from 7.5% to 10%. This new limit must be documented in a flexible benefits plan by Dec. 31, 2014, regardless of the fiscal year of the flexible benefits plan, and this change must be retroactive to the beginning of the 2013 plan year.
The IRS allows an employer to reimburse an employee on a tax-free basis up to $5,250 for certain educational expenses. However, this $5,250 tax-free employer-provided educational benefit expires after 2012. Employers should note that they can still provide some type of educational reimbursements in a more limited basis if they qualify as a business expense and meet certain requirements.
While small business owners are left dangling over the edge of the abyss, Washington is working to intervene and could. In the meantime, employers should consider communicating with employees about the ambiguity surrounding potential benefit changes for 2013 and the possibility of a 2% payroll tax increase.
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