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Iowa Paychecks Will Hit the Fiscal Cliff

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CEDAR RAPIDS, Iowa - While Congress and the White House try to hammer out a deal to avoid the fiscal cliff, a lot of eastern Iowans are probably wondering what it all means for paychecks in 2013. One thing for sure is Social Security withholding is going up in the new year.

Congress approved a Payroll Tax Holiday in 2011 and 2012 dropping employee contributions from 6.2% to 4.2%. But the holiday to stimulate the economy is over now and checks for anyone paying into Social Security will decrease by that amount to reflect the return of regular withholding rates. But as for actual tax rates in 2013, it's still anyone's guess.

Future Systems Inc. in Cedar Rapids processes the payroll for 425 companies—mostly in eastern Iowa. That adds up to about 40,000 workers. But until Congress decides on the tax rates, even the tax code experts at a payroll processing company can't predict the changes that will be made to payroll checks in the new year.

But Linda Hass, president of the company, can predict a lot of people will see smaller take home amounts due to the return of regular Social Security withholding rates and wonder why.

"Two percent may not seem like a lot when you talk about it. But when it impacts your pocket, it will be noticed," Hass said.

Hass said even if Congress and the White House come to an agreement soon it takes time to make all the electronic payroll adjustments. She estimates a minimum of five to six weeks to make those changes once the new rates are known. For her, like everyone else, the wait is frustrating.

"We don't know, we just have to sit back and wait like everybody else that elected officials do the right thing," Hass said.

Hass said workers face another potential frustration with any tax rate changes. If rates go up, but withholding takes weeks or months to catch up, then workers might not have enough money taken out of early 2013 paychecks to cover all federal taxes. For some, that might even mean owing the Internal Revenue Service (IRS) money at the end of the year rather than seeing a tax refund.

Hass said payroll processers won't go back and collect money from paychecks to make up the difference. Workers can increase withholding on their own now to cover any potential tax rate change. But until Congress acts, you wouldn't know how much.

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