Fiscal cliff could bring paycheck scramble

December 6, 2012: 1:16 PM ET
paycheck deposit
Payroll companies warn Congress must act soon to avoid the fiscal cliff -- or risk confusing companies about how much to pay their workers.
NEW YORK (CNNMoney)

The longer Congress waits to avoid the fiscal cliff, the more complicated it will be for businesses to figure out how much to pay workers early next year.

The confusion poses the biggest threat to the nation's 27 million small businesses, because the vast majority do their own payroll. That means they'll have to understand what Congress decides and calculate the changes fast.

And the nation's leading payroll group warned on Wednesday that time is running out.

The American Payroll Association said Congress must decide on tax rates by Dec. 14 or else "businesses may not have enough time to implement any new changes when the first paychecks go out for 2013." Others in the industry say Congress could wait until Christmas week, but doing so would still cause headaches.

Related: The perils of going over the cliff temporarily

Michael O'Toole, an attorney for the association, described two worst-case scenarios.

The first happens if Congress comes to an agreement after Jan. 1 but applies new tax rules retroactively.

The other is a last-minute agreement that keeps rates as they are for a few more months, with the idea of making new rules later in 2013. That could confuse payroll software programs, because some only calculate a year at a time.

There are several tax rates in play.

The easiest to handle is the current payroll tax holiday. Workers typically pay a 6.2% payroll tax, meant to fund Social Security. For the past two years, they've been paying 4.2%, and that rate is set to rise back to 6.2% on the first $113,700 in wages.

But payroll won't be simple to adjust if the Bush Tax Cuts expire and businesses also have to account for rising income tax rates.

Related: Obama's tax plan catches small employers too

"Confusion costs employers money. It takes time away from actually running their business," said Rob Basso, president of Advantage Payroll Services.

Like all others, Basso is waiting on Congress before his 10-person team of tax specialists and computer programmers can make the necessary changes to their software, which is used by thousands of small businesses in New York's tri-state area. Basso said a payroll tax change might take him half a day. A more complicated change might take half a week.

SurePayroll, an online payroll provider for 40,000 small companies nationwide, is similarly waiting before it makes software changes. CEO Michael Alter said a simple change might take a day, whereas complicated changes might take two weeks.

In the meantime, Alter had this advice for small employers: "Sign up with a payroll service to get you through this, or err on the side of conservatism and assume the payroll tax holiday and Bush tax cuts will go away."

Is your business being affected by the fiscal cliff? Email Jose Pagliery and share your story. Click here for the CNNMoney.com comment policy.

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