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Too late for payrolls to avert 'fiscal cliff'

WASHINGTON -- Workers probably won't feel the full brunt of next year's tax increases in their January paychecks, but don't be fooled by the temporary reprieve.

No matter what Congress does to address the year-end fiscal cliff, it's already too late for employers to accurately withhold income taxes from January paychecks, unless all the current tax rates remain unchanged -- an unlikely scenario.

Social Security payroll taxes will rise on Jan. 1, so workers should immediately feel the squeeze of a 2 percent cut in their take-home pay. But as talks drag on over how to address other year-end tax increases, the Internal Revenue Service has delayed releasing income tax withholding tables for 2013.

As a result, employers are planning to withhold income taxes at the 2012 rates, at least for the first one or two paychecks of the year, said Michael O'Toole of the American Payroll Association.

If employers don't withhold enough taxes in January, they will have to withhold even more taxes later in the year to make up the difference. Otherwise, taxpayers could get hit with big tax bills, and possibly penalties, when they file their 2013 returns.

The tax increases could be steep, if Congress fails to act, for workers at every income level next year as part of the "fiscal cliff."

Those making $50,000 to $75,000 a year would have an average tax increase of $2,400, according to the Tax Policy Center, a Washington research group. For workers paid every two weeks, that's about $92 a paycheck.

Workers earning $75,000 to $100,000 annually would be hit with a tax increase averaging nearly $3,700.

If the worker is paid every two weeks, that's about $142 a paycheck.

O'Toole said it would take most employers two to four weeks to update their payroll systems, once new tax withholding tables are released. For some small businesses, it could take longer.

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