How Much Federal Income Tax Will Be Withheld from Your 2011 Paycheck? (if You Have One)

The Democrat controlled Congress went home, having bailed out without voting for or against the expiration of the Bush tax cuts, set to expire January 1. Democrats wanted to wait until after the November 2 elections before announcing tax increases for 2011. Republicans tried to push a vote on extending the tax cuts but failed in the effort.

Failure of the Congress to deal with the issue will hit workers in their paychecks. Employers are in limbo because, minus the Congressional decision on income taxes, they won't know how much to withhold from your paycheck.

The added insecurity will not be good for the struggling economy, nor for employers and the employed. Employers usually receive the tax withholding tables by mid-November because it takes payroll processors time to adjust their software to reflect income tax changes. Lawmakers will be in their home turf for the November 2 elections, and when they return to their jobs, they will be thinking about leaving again for their Thanksgiving holiday. That sets up a scenario where they come back in December and announce a late decision on taxes which will create havoc and turmoil for workers and their employers.

It's the U.S. Treasury which has the responsibility of releasing the withholding tax tables to employers. Meanwhile, the payroll apparatchiks are poised and waiting. And waiting. Treasury can tell employers to set their tax tables to continue the Bush tax cuts for workers earning less than $250,000, as the President has said. That's a gamble, however, and gambles don't inspire economic confidence. There may be a new Congress in waiting after November 2.

Other just-in-case options being mentioned are a temporary period of a month or two under the Bush tax cuts rules, with changes to follow when Congress finally does act. That's not going to be very appealing if Democrats have managed to shove through the tax increases they want and workers are stuck with retroactive heavy income tax bills at the end of the year.

There could be an entirely different Congress after November 2. If Republicans succeed in their goals, the Bush tax cuts will apply across the board and the federal income tax withholding will remain as it has been. If that does not happen, the news will not be good for many Americans who have payed very little or no taxes for the past ten years. Columbia law school professor and former Treasury official Michael Graetz estimates that an additional $10 billion per month could move from worker paychecks to government coffers if federal income taxes increase across the board, according to a Wall Street Journal.