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Prepare for payroll confusion in new year unless Congress takes action

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in Small Business Tax Deduction Strategies

Prepare for payroll confusion in the new year unless a lame duck Congress acts by Dec. 31 to keep some of the so-called “Bush tax cuts.” Tax rates enacted in July 2001 are set to expire at the end of the year. Without Congressional action, tax rates will increase on Jan. 1, 2011, as pre-2001 rates go back into effect.

That’s bound to upset employees who will find themselves with less take-home pay. How much? The highest federal income tax rate will increase by 4.6%. For middle-income earners, paychecks could be reduced by $30 to $40 per week, depending on their tax situations.

Legislation this year to retain the current lower tax rates is no sure thing. However, it’s likely to pass next year, retroactive to Jan. 1. If that happens, look for the IRS to issue revised tax tables—and look for more employee confusion.

Advice: Stay in touch with your payroll staff or provider so you can answer questions from irate employees.

The pending tax increase might affect bonus plans. Some tax advisors are urging employers to consider paying out performance bonuses before Dec. 31 so employees won’t be socked with extra taxes on that income. If you normally pay out bonuses by March 15, you can generally award them this year without creating additional tax liability for employees. Consult a qualified tax expert to determine if this makes sense for you and your employees.

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