WASHINGTON (Reuters) - Bonus season could come early this year for employees who are paid on commissions, payroll servicers said on Tuesday, if Congress fails to extend the Obama administration’s payroll tax cuts beyond 2011.
Businesses are considering paying fourth-quarter or year-end bonuses in December that typically go out in January. This would enable employees to take advantage of the payroll tax cut that expires on December 31 if Congress does not act.
President Barack Obama urged Congress on Tuesday to vote next week to extend the payroll tax cuts. Senior Republican aides said a fight loomed over paying for the $100 billion package, but an agreement to extend the program was likely.
The payroll tax cut, passed in December of last year, trimmed the Social Security employee contribution to 4.2 percent for 2011 from 6.2 percent.
Payroll servicers said they were preparing for both scenarios, ready to flip either switch by New Year’s Day. Their preparations have included fielding calls from companies asking how to help employees save on their bonus payments.
If the tax cut expires, then “absolutely” businesses will consider paying employee bonuses in December, said Horacio Lopez, president and owner of Pro Data Payroll Services Inc in Gurnee, Illinois.
Mark Clason, owner of Payroll Systems in Sparks, Nevada, said he had been fielding questions from clients on how to move up bonus payments. For businesses, which do not benefit under the current payroll tax cut, the cost is the same this year and next year, he said.
“If you can afford it, you might as well save some employees some money,” Clason said. “We have had a few employers electing to do that.”
Year-end bonuses for financial sector employees are too big to take the payroll tax cut into consideration, experts said. But an employee making $50,000 a year would save $1,000 in payroll taxes this year.
An end to the payroll tax holiday will confuse employees and give employers a headache.
“The last thing an employer wants to be saddled with is having to explain to employees why my check is different,” Lopez said.
Some economists say economic growth next year would be hurt by an expiration of the payroll tax cut. That threat could force the bitterly divided Congress into action before the end of the year.
In his jobs bill released in September, the president proposed expanding the payroll tax cut by lowering the rate to 3.1 percent for employees. The business contribution rate would also fall to 3.1 percent from 6.2 percent on the first $5 million in wages paid.
The challenge for extending or expanding the payroll tax cut will be persuading a thrifty Congress to swallow the cost and take on more deficit spending.
Senator Jeff Sessions, the top Republican on the Senate Budget Committee, said it would be a “real mess” to pass the stimulus provisions now that the super committee has failed to reach a deal.
“We don’t have the money to continue to borrow ... to fund these programs,” Sessions told Reuters Insider on Tuesday.
But some tax practitioners are saying election-year politics may trump fiscal frugality.
Members of Congress “are going to push things off to keep people from yelling and screaming at them,” said Robert Gard, managing director at Gard & LaFreniere LLC in Alpharetta, Georgia. “My gut tells me they’re going to extend it.”
Editing by Howard Goller and Andre Grenon