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Payroll processors fume as Congress fiddles on tax-cut extension

Payroll processors watched Congress' debate over extending a payroll-tax cut with frustration, and they were warning companies about the difficulty of implementing a temporary provision passed by the Senate.

Payroll processors watched Congress' debate over extending a payroll-tax cut with frustration, and they were warning companies about the difficulty of implementing a temporary provision passed by the Senate.

Payroll companies can react quickly to a yearlong extension for the first paycheck of 2012 or adjust the second paycheck to correct problems, said Pete Isberg, president of the National Payroll Reporting Consortium, an industry group. Payroll providers still do not like a second consecutive year of December tax-law changes or the Senate-backed two-month extension of the tax cut that could create unprecedented complications.

"Payroll people feel like their concerns are not heard at the congressional level sometimes," said Mike O'Toole, who oversees government relations at the American Payroll Association. "Or else, Congress wouldn't even consider something like a two-month extension that in the end is going to cost companies more money to pay for reprogramming systems."

In a typical year, the 12.4 percent payroll tax that funds Social Security is split evenly between employers and employees. In 2011, under a tax law signed by President Obama on Dec. 17, 2010, employees pay 4.2 percent while employers continue to pay 6.2 percent.

The wage base for the tax is capped at a level that is adjusted annually for inflation. In 2012, the tax will not be assessed for wages above $110,100.

Obama pushed to drop the tax rate on the employees' side to 3.1 percent for 2012 and expand a variation on the tax cut to employers.

On Dec. 13, the House of Representatives passed a bill that would extend the expiring 4.2 percent rate for all of 2012.

Four days later, the Senate responded with a two-month extension of the 4.2 percent rate. Over the weekend, House Republicans objected to the Senate plan, citing Isberg's analysis.

The Senate added a twist. Under its bill, only the first $18,350 of wages would be taxed at the lower rate. That's one-sixth of the $110,100 annual limit, and the provision was designed to prevent the benefits from flowing to high-income workers who would be paid more than $18,350 in the first two months of the year.

More than 10 percent of the workforce will reach the $18,350 limit, Isberg wrote.