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How to withhold employment taxes given possible expiration of “Bush tax cuts”

So far, employers might take three different actions for withholding during the first few paychecks in 2013. Withholding has become an issue due to the possible expiration of the “Bush tax cuts,” which took effect on January 1, 2001.

(1) Do nothing; wait for guidance. The IRS issued an announcement to employers who are looking for the 2013 withholding tables. The IRS stated, “We are aware that employers have questions with respect to 2013 withholding. Since Congress is still considering changes to the tax law, we continue to closely monitor the situation. We intend to issue guidance by the end of the year on appropriate withholding for 2013.” (E-New for Tax Professionals, Issue 2012-51, December 21, 2012).
(2) Use 2012 tables. According to the American Payroll Association (APA), neither the Treasury Department nor the IRS has released any official guidance on how employers should calculate income tax withholding on 2013 payrolls that must be processed before 2013 withholding tables are released. Although the IRS says it intends “to issue guidance by the end of the year on appropriate withholding for 2013,” many employers will have to process their first 2013 payroll before that guidance is issued. Therefore, the APA believes employers should continue to use the 2012 withholding tables if they have to process their first payrolls of 2013 before any official guidance is released, as it is the only workable option (http://www.americanpayroll.org/; December 2012).
(3) Use 2000 tables with 2013 projected exemption amount. Another option would be for employers to use the year 2000 percentage method withholding tables together with the 2013 annual exemption amount, which is projected to be $3,900, until the IRS issues the 2013 guidance. The 2000 percentage tables are reproduced on pages 34 and 35 of IRS Pub 15 (2000). Below is the projected annual exemption amount broken down into payroll periods.