Feb 01, 2013

Fiscal Cliff: Is it on Solid Ground?

With the deficit of $4 trillion income taxes are going up, but only for the rich. However, payroll taxes were hiked for everyone. And government spending cuts kicked down the road has lead the nation and job market especially towards a uncertain, unclear future.

Reluctance to add workers by the small business owner with less than 500 employees, which roughly constitute half of private sector employment, has become a worry. Many small business owners expressed concern about the immediate impact of the payroll tax increase, but they said it would take a while to understand how other aspects of the legislation would impact their bottom line.

The most straightforward negative effect lies in the termination of the payroll-tax holiday that had reduced the employee’s share of Social Security tax from 6.2 to 4.2 percent of wages. While this isn’t specific to small businesses, the pattern is clear: Payroll-tax cuts stimulate job creation and payroll-tax increases discourage it. Joel Prakken of Macroeconomic Advisers estimated that the payroll-tax cut added 300,000 jobs to the U.S. economy. Therefore, doing away with the payroll-tax cap should eliminate 300,000 jobs.

“As long as the federal government does not have a plan to reduce spending and address the deficit, small business owners are very concerned in very close future months that the plan that Congress proceeds with will include tax increases,” ~ Gregg Thompson, State Director for the National Federation of Independent Businesses

Mary Brogan, spokesperson for the National Small Business Association, said the lingering national debt could have a chilling effect on growth as businesses hesitate to take on additional employees or debt.  Brogan said the lowered tax threshold impacts a limited but important group of business owners – those who are more likely to expand and hire new employees. The limit creates a fairness issue for businesses that pass through income to owners.

But there is some good news…

The Fiscal Cliff legislation extends indefinitely the exclusion from wages for reimbursements of employer-provided educational assistance and amounts paid by an employer under a qualified adoption assistance program.  Under Section 127 of the Internal Revenue Code, employers may reimburse an employee, tax-free, up to $4,260 for qualified tuition assistance, despite relevance to job.  And under Code Section 137, employers may reimburse an employee tax-free up to $12,650 for expenses related to adoption of a child.  

The legislative compromise also includes a remedy for estate tax exception, originally scheduled to drop to $1 million and now remaining at $5.12 million. After reaching the $5.23 million threshold, the maximum tax rate will rise 5 percentage points to 40 percent. 

“Consumers, business-to-business transactions, I think everybody is going to tighten things up.” ~Mary Brogan, spokesperson for National Small Business Association