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The United States is facing a looming financial precipice at the end of the year, when an assortment of Bush-era tax cuts expire, automatic spending decreases kick in and other provisions come to an end—including the U.S. payroll tax legislation that reduced the payroll tax rate from 6.2 percent to 4.2. percent. The quandary, referred to as the “fiscal cliff,” is being regarded with trepidation by lawmakers and members of the public alike, and the increased media attention in the wake of the presidential election is serving to exacerbate these worries.
A recent opinion poll conducted by Greenberg Quinlan Rosner Research for Small Business Majority found that small business owners are concerned as well. Specifically, nearly eight in 10 of the 500 entrepreneurs who took part in the survey said they were aware of the impending fiscal cliff, and the vast majority were fearful of its repercussions.
More than three-quarters of respondents said they were worried about the expiration of the U.S. payroll legislation that cuts the employee portion of payroll taxes by 2 percent and affords the typical household an extra $1,000 per year. Projections estimate that the expiring payroll tax holiday could cost nearly 1 million jobs and impact economic output in 2013 by nearly a full percentage point. Entrepreneurs anticipate decreased disposable income among their customer bases, which is likely to translate into a reduction in demand for their products and services.
“From a business perspective, what I’m most concerned with is consumer demand,” said Mike Brey, owner of Maryland- and Virginia-based Hobby Works. “For that demand to be there, we need to ensure middle class taxpayers have spending money. That means keeping their tax rates where they are now rather than letting them go up, and extending the employee payroll tax holiday, so consumers don’t see smaller paychecks next year.”
Expiring payroll tax holiday only part of the picture
The payroll tax changes aren’t the only fiscal cliff aspect that entrepreneurs are worried about. More than three-quarters (77 percent) of surveyed small business owners expressed concern about infrastructure cuts, while 65 percent said they feared the effects of the $500 billion in defense cuts slated to occur over the next decade. Other problematic areas included funding reductions for the U.S. Small Business Administration’s business loan and counseling programs, and cuts in government contracts available to small enterprises.
| Summary: | Entrepreneurs are concerned about the expiration of U.S. payroll tax legislation and other tax cuts set to occur as part of the “fiscal cliff.” |
When Hurricane Sandy battered the East Coast in late October, thousands of people lost power, while some areas were decimated by the force of the superstorm. In acknowledgment of this, the Financial Accounting Standards Board (FASB) extended the deadline for comment on a staff paper about potentially modifying accounting legislation for private companies.
Specifically, the paper, titled “Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies,” outlines an approach for determining whether and when to alter U.S. Generally Accepted Accounting Principles (GAAP). Private company stakeholders—both individuals and organizations—were invited to comment on six differentiating factors pertaining to the financial reporting considerations of private companies, including:
- Access to management
- Accounting resources
- Learning about new financial reporting guidance
- Ownership and capital structures
- Strategies for investment
- Types and number of financial statement users
In order to ensure that stakeholders affected by the storm were given the chance to weigh in, FASB chair Leslie Seidman announced earlier this month that the deadline had been lengthened to November 9 from the original cutoff of October 31.
“This will give everyone an opportunity to communicate their views, while providing the staff sufficient time to present its findings for deliberation by the Private Company Council and the FASB at the PCC’s first public meeting on December 6,” Seidman said in a statement.
Moving forward after comment period close
Now that the extended comment period has ended, the FASB and the PCC will use the feedback to identify the unique needs and challenges of those who use private company financial statements, with the goal of mitigating the complexity and cost of private company financial statement preparation in line with GAAP accounting compliance standards. The FASB and the PCC must both agree upon the proposed decision-making framework before the process can move forward.
“The development of a sound decision-making framework is essential to our ongoing efforts to address the unique needs of private company stakeholders while maintaining the high quality of U.S. GAAP,” Seidman said in a July statement. “We anticipate that the guidance designed to identify cost-effective alternatives for private companies also will benefit some of the FASB’s public and not-for-profit standard-setting activities.”
| Summary: | The deadline for comment on an FASB paper about modifying accounting legislation for private companies recently passed, after being extended. |
U.S. payroll legislation can get complicated. Most companies know the importance of maintaining U.S. payroll compliance, but may stumble when it comes to determining which payroll deduction laws apply to their employees. The fact that some deductions are mandatory while others are voluntary has the potential to further complicate matters. There are numerous different types of payroll deductions, including:
- Federal tax withholding
- State tax withholding
- Voluntary deductions
- Wage garnishment
Federal tax withholding
Federal employment tax laws mandate that employers deduct a portion of their workers’ earnings as Medicare tax, Social Security tax and federal income tax. The current U.S. payroll tax legislation gives taxpayers a 2 percent payroll tax cut, reducing the rate from 6.2 percent to 4.2 percent. For the average family, this represents a nearly $1,000 tax bill reduction, according to The Wall Street Journal. As The New York Times reported earlier this month, the chances of this allowance being extended into 2013 are slim, which means companies and employees alike should be prepared for the tax holiday to come to an end.
State tax withholding
The particulars of these deductions vary from state to state. This type of tax withholding may include:
- Income tax
- Local income tax (for instance, New York City’s income tax and Ohio’s school district tax)
- State disability insurance
- State unemployment tax
Some states, such as Arizona and Pennsylvania, ascribe to a flat percentage withholding method.
Voluntary deductions
Voluntary payroll deductions must be authorized by employees. They come in various forms, including:
- Insurance premiums (accident, disability, health, life, etc.)
- Retirement investment options, such as 401(k) contributions
- Union dues
Wage garnishments
Wage garnishments are court-ordered and require employers to withhold wages in conjunction with workers’ debts. A common type of wage garnishment is child support. Under Title III of the Consumer Credit Protection Act, “up to 50 percent of an employee’s disposable earnings (may) be garnished for child support if the employee is supporting a current spouse or child, who is not the subject of the support order, and up to 60 percent if the employee is not doing so. An additional five percent may be garnished for support payments over 12 weeks in arrears.”
| Summary: | U.S. payroll legislation can get complicated, as there are different types of mandatory and voluntary deductions. |
The economic downturn of the past few years has affected virtually every industry, but the unemployment rate among senior accounting consultants is significantly lower than the national average across all occupations, according to recent data from Robert Half International.
In a recent interview with Accounting Today, Paul C. McDonald, a senior executive director at Robert Half International, noted that the unemployment rate for senior accountants and auditors is 4.1 percent. This figure is significantly lower than the 7.8 percent rate recorded for the entire labor force in September.
Professionals with technology skills are sought-after in many fields, and those with experience using accounting technology are no exception—for instance, business systems analysts who collate financial information from reports and place the data into interactive dashboards for analytical purposes.
Those who have strong accounting compliance skills are also in demand, particularly internal and external auditors familiar with Basel III regulatory standards and the requirements of legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act, which stiffly regulate goings-on within the financial services industry and public companies.
“The public accounting firms that are doing external audit are going to demand individuals that have financial services experience and audit expertise, but your internal audit departments are going to do a lot of self-policing as a result of Dodd-Frank and Basel III and whatever other regulation is going to come out,” McDonald told the news source.
In addition to the financial services sector, there is also a particular need for accounting and finance professionals within the healthcare industry, largely due to the upheaval of healthcare reform. Also, the seemingly perennial demand for forensic accountants and auditors appears to be continuing, according to McDonald.
Accounting software as an alternative
As well as causing the unemployment rate to take a major hit, the recession has been responsible for many business owners electing to tighten their belts in order to cut costs and mitigate any damaging economic effects on their companies. Those unwilling or unable to bring in accounting consultants may consider turning to accounting software as a way to streamline their financial processes while ensuring compliance.
| Summary: | The unemployment rate among senior accounting consultants is significantly lower than the national average, according to a recent study. |
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For the 2011 and 2012 calendar years, taxpayers have enjoyed the benefits of U.S. payroll tax legislation that reduced the payroll tax to 4.2 percent from 6.2 percent—a decrease that translated into the average family’s tax bill being cut by nearly $1,000.
As the New York Times reported earlier this month, the chances of the U.S. payroll legislation being extended past the end of the year are unlikely for several reasons. Specifically, Treasury secretary Timothy Geithner stressed its temporary nature in front of the Senate Budget Committee, the White House has not indicated any plans to pursue a continuance and House Minority Leader Nancy Pelosi said she believed the tax cut should be allowed to expire, the news source reported.
Economic adviser supports payroll tax holiday extension
Lawrence Summers, former director of the National Economic Council under President Barack Obama, recently spoke out in support of an extension, citing benefits of the reduced rate, such as stimulating consumer spending and boosting the jobs market.
“This is not the right moment to repeal the payroll tax cut,” Summers told the Center for American Progress think tank. “It is $120 billion that enables cash-strapped families to spend money on what they need and provides incentives certainly for small businesses and perhaps beyond.”
If the reduced payroll tax rate is not extended into 2013, it will expire at the same time as a battalion of Bush-era tax cuts, a situation commonly referred to as the “fiscal cliff.”
“It is essential that we avoid falling over that cliff,” Summers said, as quoted by Reuters. Echoing other business experts, policymakers and think tanks—including the nonpartisan Congressional Budget Office—Summers warned that the combination of reduced government spending and higher taxes could have a dire effect on the country’s economic recovery efforts, and might even result in another recession. According to Politico, Michael Feroli, the chief U.S. economist for JPMorgan Chase, authored a report earlier this year that forecasted the nation’s economy would take a $125 billion hit next year if the tax break were allowed to expire.
| Summary: | A former White House economic adviser recommended a U.S. payroll tax legislation extension to offset the effects of the impending fiscal cliff. |
In a recent interview with Fox Business’ Regulation Nation, John Allison, former CEO of the BB&T Corporation, spoke about the impact that the Sarbanes-Oxley (SOX) Act of 2002 has had on American companies in the decade since the accounting legislation was put into place.
Speaking with Fox, Allison argued that despite introducing a complex framework of accounting management requirements that call for companies to jump through considerably more hoops than previously, SOX has not actually decreased fraud. Rather, he posited, the resources sunk into it were misdirected into “irrational, non-effective risk management.”
“There has been an exponential increase in regulatory impact on business, which is clearly reducing our standard of living because businesses are spending intellectual capital, their time and energy making government bureaucrats happy,” Allison told the news source.
Allison was a panelist at the 2012 COMMIT!Forum on corporate responsibility, which took place earlier this month on Wall Street and was attended by more than 700 chief executives, corporate responsibility and sustainability officers, policy makers, thought leaders and academics. The forum featured a series of sessions around the theme of “UnConvention,” including plenary and breakout panels titled “Crony Capitalism,” “Dual Deficits,” “Digital Freedom” and “Energy Security.”
E&Y presents less negative view of SOX
A report released by Ernst & Young earlier this year acknowledged that the bulk of SOX-related criticism has centered on Section 404 of the legislation, which relates to internal controls over financial reporting. However, as noted in the report—titled “The Sarbanes-Oxley Act at 10: Enhancing the reliability of financial reporting and audit quality”—a series of regulatory and legislative actions have been taken since the standards were enacted in July 2002, with the goal of making accounting compliance less arduous while still allowing the regulations to remain comprehensive.
Unlike Allison, who views SOX as ineffective, E&Y’s Americas area managing partner, Steve Howe, believes SOX serves as a solid platform upon which to build better compliance and audit quality guidelines. In a March testimony before the Public Company Accounting Oversight Board, a nonprofit corporation created by SOX, Howe said, “The foundation for audit quality was strengthened by Sarbanes-Oxley; we believe there are opportunities that should be pursued to build on that strong foundation.”
| Summary: | A decade after the Sarbanes-Oxley Act was introduced, there is still disagreement over the effectiveness of the accounting legislation. |
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Last December, following much discourse and dissension, Congress finally managed to hammer out a two-month extension of the U.S. payroll legislation that gave taxpayers a 2 percent payroll tax cut. The Temporary Payroll Tax Cut Continuation Act of 2011 was finalized just two days before the decreased rate was set to expire at the end of the year, which gave lawmakers time to formulate a more far-reaching U.S. payroll tax compliance agreement.
In February, an agreement was made to keep payroll taxes at the current 4.2 percent level on wages up to $110,100 through the end of 2012. As October commences and the leaves begin to turn—a sure sign that the end of the year is approaching—questions are being raised about whether another extension is in the offing, an idea most dismiss as unlikely.
U.S. payroll tax legislation extension unlikely
As The New York Times notes, Treasury secretary Timothy Geithner recently stressed the temporary nature of the U.S. payroll tax legislation while testifying before the Senate Budget Committee. Similarly, the White House has shown no indications that it is pushing for an extension, even as lawmakers begin to meet privately about tax extenders and the impending fiscal cliff, according to congressional aides cited by the National Journal Daily. Indeed, support for the continuation of the tax cut has grown tepid even among the Democrats who championed the bill’s initial passage, and House Minority Leader Nanci Pelosi has gone on record saying she believes the measure should be allowed to expire, the Times notes.
The news source offers a two-pronged explanation for the waning support of the payroll tax holiday.
“First, both Democrats and Republicans would rather focus on the broader political and economic issue of the fate of the Bush-era income tax cuts,” according to the media outlet. “Second, though the economy has not become significantly stronger over the past year … independent economists say that the economy could shoulder the payroll tax increase without undue harm.”
That said, an April report by Michael Feroli, the chief U.S. economist for JPMorgan Chase, estimated that ending the payroll tax holiday would result in a $125 billion hit to the economy in 2013, Politico notes. This, in conjunction with the expiration of the Bush-era rates and cuts to defense and domestic programs, could result in another recession, according to the nonpartisan Congressional Budget Office.
| Summary: | The future of the U.S. payroll tax legislation that gave taxpayers a 2 percent payroll tax cut looks uncertain going into 2013. |
