1. Fiscal Cliff: The unprecedented convergence of several major events at the year-end—known as the “fiscal cliff”—will affect virtually all businesses and have broader economic implications for the nation unless an agreement is reached. The current payroll tax holiday would expire, as would the lower “Bush-era” federal income tax rates (a particularly difficult scenario for the many small businesses set up as “pass-through” entities, wherein business income is taxed at their owner’s personal rate). Mandated federal spending cuts will also have direct or indirect effects on many companies. Capital gains and estate tax rates will increase, dividends will be taxed as ordinary income, and several popular current tax credits will end.
2. Tax Gap: The IRS continues to aggressively look at ways to close the estimated $450 billion gap that exists between taxes expected to be collected and the actual tax owed—the large majority of which is believed to come from underreporting, which includes understating income and overstating deductions. IRS examiners are focusing their enforcement resources in those areas thought to have the highest degree of noncompliance, including affluent individuals and small businesses, and are making greater use of technology to more efficiently identify audit targets.
3. Health Care Reform: After the Supreme Court ruling and the presidential election this year, health care reform remains essentially intact. In 2013, Medical Loss Ratio standards will continue, meaning that insurance carriers that don't spend the prescribed percentage of premium dollars collected on actual medical care will be required to provide rebates to policyholders. Large employers (those that filed 250 or more Forms W-2 in the prior tax year) will be required to report the cost of employer-sponsored health coverage on their employees’ 2013 Forms W-2. New in 2013 is the $2,500 limit on an employee’s contribution to a medical flexible spending account as well as the employer’s obligations to withhold and report relative to the additional Medicare tax.
4. Worker Misclassification: More active enforcement efforts are expected from the IRS and the U.S. Department of Labor in 2013 with regard to the misclassification of workers as independent contractors. Pending legislation at the state and federal levels, as well as executive orders at the state level establishing dedicated task forces to look at this issue, continued throughout 2012. Legislative reform as part of the resolution for the fiscal cliff is also expected to include provisions that would impose harsher financial penalties on employers who misclassify their workers. Further national and regional enforcement efforts/initiatives specific to industries in lower wage sectors, such as hospitality and construction, are also anticipated in 2013.
5. Tax Reform: As the country’s budget deficit grows, a topic sure to garner much legislative discussion during 2013 is the possibility of sweeping tax reform. Among the tax benefits which could get consideration, especially for high earners, are in such traditionally popular areas as the employer contribution to health care premiums, employer and employee retirement plan contributions, mortgage interest deduction, and charitable contributions. In addition, the current tax advantages of structures such as S corps could also be under assessment.
6. Retirement Savings: Employers should be aware of several developments in the retirement arena. The limits for contributions to retirement plans such as the 401(k) will increase in 2013. Legislation may also be introduced to manage the effects of 401(k) “leakage” that result when employees draw down retirement savings by taking loans and withdrawals from their plans. Separately, Paychex expects that federal policymakers, along with those in some key states, may consider legislation to address the growing view that many workers are not saving enough for retirement. This could possibly include a mandate that certain employers that do not currently sponsor a retirement plan for their employees withhold a modest amount of a worker’s pay for deposit into a basic, automatically enrolled retirement investment.
7. National Labor Relations Board Activity: In the wake of President Obama’s re-election, a continued pro-labor focus is expected from this enforcement agency. While broad pro-union legislation is unlikely to pass in the next Congress, Paychex expects the NLRB to seek to adopt rules to expedite the election process or further assist unions in their efforts to organize employees. To this end, the NLRB is likely to continue to scrutinize employer protocols even at nonunionized companies, including social media policies, employment-at-will disclaimers, and harassment investigation procedures. All employers should be closely watching the NLRB agenda and be ready to consider changes to their internal practices and policies as needed.
8. U.S. DOL Agenda: The Department of Labor’s Wage and Hour Division is expected to pursue an active regulatory agenda with the anticipated release of final regulations for the expanded military family leave under the Federal Family and Medical Leave Act, and a final rule to substantially restrict current minimum wage and overtime exemptions for companionship services and live-in domestics. The DOL may also revive the rule process for “Right to Know” regulations which could require employers to provide written notification of a worker’s status and to deliver required wage statements. The agency is also expected to continue its assertive wage and hour enforcement program, especially in the hospitality industry and others where many employees have tips as part of their compensation.