From the January 2012 issue of CeridianVoice newsletter.

The tax compliance challenge: What to expect in 2012 and beyond

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The New Year never fails to bring celebrations, fresh starts — and for employers, changes to payroll and tax legislation. 2012 is certainly no exception, with several tax compliance changes taking effect in January with little notice for employers.

More changes to come

With the presidential election looming, health care reform still evolving and lawmakers continuing efforts to improve the economy, employers shouldn't be surprised to see more changes throughout the year.

"The need to reduce the $1 trillion annual budget deficits and the $15 trillion accumulated public debt will absolutely force Congress to make hard choices in connection with tax reform," said Jim O'Connell, Ceridian's executive consultant on legislative issues in Washington, D.C. "It's possible that deficit reduction measures will involve curtailing major tax incentives affecting employee health coverage and retirement benefits, in addition to Social Security reform."

O'Connell also believes the requirement that employers report health care on Form W-2, while purely informational right now, may be a step toward taxing some portion of employer-sponsored health coverage. "The big question is whether Congress and the President can agree to any of these measures during a presidential election year," O'Connell said.

These election-fueled tax legislation battles certainly don't make things any easier on the employers who must implement the changes in the end. "It's frustrating to hear politicians phrase tax changes in negative terms to win their case," said Brenda Pearce, corporate payroll manager for Regions Bank and a Ceridian Customer Advisory Board member. "To say that ending the payroll tax holiday is a 'tax increase' only makes employees more upset, when really it simply reverts taxes back to usual."

While hopes are high for tax reform that combines economy-boosting rate reductions with federal debt solutions, can compromises be reached in today's hyper-partisan political environment? The answer is forthcoming, but for now, employers should simply continue to monitor legislative battles and prepare in advance for new compliance requirements that may arise.

Tighter deadlines, leaner staff

Annual changes in tax and payroll legislation are commonplace for seasoned employers, but the implementation timelines are becoming shorter and shorter, forcing employers to scramble to stay in compliance.

"Electronic tax filing options were recently put in place to help employers improve reporting efficiency, seemingly justifying shorter implementation deadlines for adjustments," said Terri Kirby, Ceridian's tax compliance expert. "But with lean resources, it's difficult for tax and payroll teams to meet their effective dates alongside other business needs...not to mention find room in the budget for tax increases and credit reductions."

According to Pearce, the past few years have brought more tax compliance challenges than ever in her 15 years of experience as a payroll professional. "As a national company, it's difficult to keep up with the increasing number of state and local tax requirements," said Pearce, "especially those that must be implemented retroactively." She noted that a recent retroactive Connecticut state tax change even caused some Regions employees to receive a $0 paycheck at the end of the year because the necessary system changes delayed implementation.

Organizations such as the National Payroll Reporting Consortium (NPRC) have been advocating for longer implementation timelines on Capitol Hill. Last December during the payroll tax holiday battle, NPRC urged Congress to reconsider a wage cap in the initial two-month extension proposal, saying there was insufficient lead time for employers and administrators to program and test payroll systems by January. Thankfully, the proposal was rejected and replaced by one without a wage cap, allowing payroll professionals to avoid implementing a tax increase in their systems during the holidays.

Uncertainty about volatile changes such as the payroll tax holiday extension and health care reform tax changes also forces employers to continuously monitor legislative updates and prepare for the variety of potential results. "If we didn't have Ceridian and other vendors pushing us compliance information, I would hardly be able to sleep at night knowing the potential risk associated with the high volume of changes going on right now," Pearce said.

Many companies are turning to payroll and tax vendors to help them manage these increasingly complex legislative challenges. How does your company manage them? Let us know in the comments below. 
 
 Key changes for 2012
The end of 2011 brought a whirlwind of legislative changes along with basic annual income tax adjustments and health care reform provisions.
  • The payroll tax holiday was extended for two months in the final hour after a partisan battle threatened to thwart the payroll tax holiday extension the week before Christmas, thereby delaying a potential $1,000 tax increase for most American families. However, employers and employees still await the final decision on whether or not the holiday will be extended through the rest of 2012.
  • Federal Unemployment Tax Act (FUTA) credit reductions of 0.3 percent to 0.9 percent went into effect for the 21 states that have not yet repaid the federal government for unemployment claim loans. Additional tax liability was due with the 2011 fourth quarter filing in January 2012.
  • Pennsylvania Act 32, passed in 2008 to reform and standardize the Pennsylvania earned income tax system, went into effect on Jan. 1, 2012. Employers with office locations or virtual employees operating within Pennsylvania must withhold income taxes and submit them to their district's elected tax collector.
  • Reporting health care costs on Form W-2 becomes mandatory for large employers (those submitting 250 or more forms for 2011) starting with 2012 forms completed in 2013. The requirement is optional for small employers until 2013 forms completed in 2014.