Will Payroll Tax Cuts Really Help Your Business? Credit: Dreamstime.com

 

The current debate in Congress over whether to further extend the payroll tax cuts has left American workers and small business owners uncertain about how much they will pay in payroll taxes in the coming year. However, those most affected may be small business owners who will miss out on potential savings from tax cuts if a new deal is not reached before the current tax cuts run out on Dec. 31.

Current tax laws require employees to contribute 4.2 percent of their first $106,800 in salary into Social Security, while employers must pay 6.2 percent toward these benefits. Competing proposals penned by Republicans and Democrats are currently making their way through Congress. One of the major contentions between the two groups is how continued payroll tax cuts will be paid for.

Cuts for small businesses

Under the legislation proposed by President Barack Obama that is currently in Congress, small business owners would receive a tax cut on their first $5 million in payroll, which would result in qualifying businesses paying 3.1 percent tax in payroll expenses in the coming year. During this past year, employer contribution to these payroll expenses stood at 6.2 percent. If a deal is not struck by the deadline, the tax contribution for employers would remain at 6.2 percent.

According to Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, which describes itself as "a nonprofit, nonpartisan policy organization," these cuts would be beneficial to small business owners since an overwhelming majority of small businesses operate at under $5 million in payroll.

"Basically, this is an idea to give small businesses relief on their payroll taxes," Marr told BusinessNewsDaily. "The president proposed that and so far the Republicans have been very hostile to it, so it may not happen, but if it were to happen obviously that would be a benefit for small businesses."

The benefits would be twofold for small business owners as they would be required to pay half of their current payroll tax obligations while also reaping the benefits of customers who will have more money to spend as a result of larger tax cuts.

"For businesses, the most important thing is to have customers," said Marr. "If every family has $1,000 less in income next year, that is a potential hit for small businesses as many small businesses could lose customers. There is a risk that the economy, which is still very vulnerable, could weaken and head in the wrong direction."

Additionally, the savings which businesses can experience from these cuts can be used in several other areas, according to John Arensmeyer, president and chief executive officer at Small Business Majority, a self-described "advocacy group founded and run by small business owners to focus on solving the biggest problems facing small businesses today."

"There will be a tremendous benefit for small businesses, because it will put money directly into their pocket," said Arensmeyer.

"Maintaining and expanding the cut on the employee side will be beneficial because there will be more money circulating in the economy. The money can go in a variety of directions, allowing businesses to hire more employees or keep money invested in other areas."

The National Small Business Association also supports the extension of the cuts, saying they would help small business owners keep cash in hand, which would allow them to have more access to capital. Not everyone, however, is convinced that the cuts will go far enough to help businesses in this way.

"Frankly, I think that the cut has very little impact," said JoAnn Fleming, president of Fleming and Associates CPA. "These cuts have been in effect for one year (for employees) and have done little. The lowered number is good for employers, but it helps the bottom line only ever so slightly.  The cut is too small and I don’t think it will be a deciding factor for hiring employees or retaining employees. The savings are going to absorbed somewhere, with utility bills and insurance costs rising, so unfortunately the savings will have a minimal effect on small businesses."

Benefits for workers

Workers would pay the same 3.1 percent on payroll expenses under these proposed cuts. Currently, workers pay 4.2 percent thanks to last year's tax cuts. This two percent cut saved middle-class families making $50,000 an average of $1,000 last year. Under the new proposal, families making $50,000 a year would save an average of $1,500. Furthermore, according to a payroll tax calculator on the White House homepage, these cuts could help a wide range of workers. For example:

  • A single worker making $40,000: Under the current law, that worker would save $800 and an additional $440 if the new cuts go into effect. If the current plan were to expire, that person would owe an additional $800 in taxes.
  • A married couple making a combined $65,000: Under the current law, this couple would save $1,300 a year while potentially saving an additional $715 if further cuts are put in place. If the law is not extended, they would owe an additional $1,300 a year.

Employees will be required to pay 6.2 percent for payroll expenses in 2012 if a new deal extending or expanding the current plan is not reached by the deadline.

"It is a tough time right now in the economy, and any help that the government can be on a temporary basis is going to help," said Arensmeyer. "The fact that people continue to be unemployed means there are fewer customers for small business products. These are temporary cuts and we are not expecting them to be there forever, but now is a critical time and to reduce costs and keep money flowing in the economy is a huge benefit to small businesses. Small business generates two-thirds of net new jobs in the economy. As goes small business, so goes the economic fortunes of the country."

In an article posted on CNN, Obama noted in a recent speech the impact these current cuts can potentially have on the economy. The president was quoted in that speech saying, "it makes absolutely no sense to raise taxes on the middle class at a time when so many are still trying to get back on their feet." The president added he would "continue to urge Congress to stop playing politics with the security of millions of American families and small business owners and get this done."