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Small Change: How Payroll Tax Cuts Affect Your Business

The new year will forever dangle the opportunity for change. We’ll swap the old calendar for a fresh one, vow to eliminate potato chips, and, of course, adopt a fitness program that won’t disintegrate six weeks in.

The government is getting in on the act, too. Every American worker will enjoy a 12-month, 2 percent payroll tax cut in 2011. A majority of the measure’s $111 billion cost will find its way back into the economy, and certain small businesses should be able to capitalize on that stimulus.

But first, businesses small and large need to handle the mechanics of this temporary tax holiday. Whether it’s a one-person, DIY enterprise or a national conglomerate, each employer will have to recalibrate its payroll system.

Due to the late nature of the legislation, the IRS is giving businesses some breathing room. Companies have until Jan. 31 to tweak employees’ withholding to reflect the reduced 4.2 percent Social Security tax. And if a business paid 2011 wages using the permanent 6.2 percent rate, they’ll have until March 31 to adjust over-withholding.

Unfortunately, this measure provides savings to employees only.

Ebere Okoye, a certified public accountant in Hyattsville, Md., has been talking with her clients to make sure they have the law straight.

“I thought it was going to be 4 percent,” Okoye said. “I want to make sure my clients don’t make a mistake and think the cut applies to them, too.”

Okoye is pointing her clients, many of whom are sole proprietors, toward IRS Publication 1036, which directs employers on how to adjust employee withholding.

The legislation is meant to be a moderate, consistent stimulus by putting a little more money into everyone’s paycheck throughout the year. A worker earning $50,000 annually will see his or her biweekly check jump about $38 — not a fortune by any stretch but enough to possibly influence shopping habits.

“The way people get money affects the way they use it,” said Eli Lehrer, the national director of the Center on Finance, Insurance and Real Estate at the Heartland Institute, a think tank. Lehrer said that because the money is coming in small installments, it will likely augment disposable income. He sees retail establishments and restaurants as the big winners from the payroll tax cut.

While large retailers will certainly capture a healthy share of that spending, small businesses should look at the extra cash in workers’ pockets as an opportunity.

“Small businesses can reposition themselves in this economy,” Okoye said. “Any small business that wants to survive and thrive needs to adapt.”