How The Fiscal Cliff Is Hurting Small Business

Susan Solovic explains the effects of the money fight.
5:42 | 12/12/12

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Transcript for How The Fiscal Cliff Is Hurting Small Business
Small businesses are living on the edge just like the rest of us teetering ever closer to that fiscal -- So how can business owners braced for a possible climate. Here with ideas as New York Times best selling author and ABC news small business contributor students all of -- welcome back -- great to see how things Tonya nice to be here thanks so a major part of the fiscal -- as a potential increase in payroll taxes what do business owners need to know about us. Well Tanya they need to know those payroll taxes are going to go up from 24 point 2% to six point 2% so you need to be poised and positioned to make that adjustment in your payroll taxes. Not half -- that's going to come out of the employee's paycheck but they employer also pays half of that tax. We're really gonna see the big hit is with a self employed because of self employed individual pays both the employee's -- and the employers app so they're going to be paying that full six point 2%. Which is going to be a significant hit to their income so these big changes how can business owners avoid making mistakes -- there is a change in rates. Well that's a good question most of small businesses handle their payroll themselves and they do it manually. So I recommend first of all of that you higher payroll service because they're gonna stay on top of these changes. And they're gonna keep you from making mistakes. And the problem with payroll taxes is if you make a mistake it can be costly in terms of penalties and interest but if you don't want to outsource the payroll certainly. You need to talk to a tax professional -- talk to your CPA or accountant. Or talk to a tax attorney. So that you are positioned to get it right the first time so you don't end up paying those extra fees and -- of course if your business owner who makes over 250000. Dollars your other taxes could rise so I advise people to estimate their tax bills for 2013. That's problematic for small businesses and actually it's that uncertainty that is causing small businesses optimism to actually plummet again. Because and small businesses really can't plan appropriately. But. Regardless of what happens best guess is your taxes are going to go in any income tax bracket so look at what you paid historically and -- prepare accordingly certainly. Talk to your tax professional about how much of a percentage of increase you should look at depending on your tax bracket now here's the catch 22 for small businesses. -- most small businesses 75%. Are pass through entities. That means the income from their businesses. Passed through to their personal income tax return so they don't pay corporate rates they pray. Personal income tax rate so when you're looking at every income tax break -- potentially. Going -- you're also seeing that the tax about small business owner is going to be paying is gonna go up but. They don't keep that money themselves they put that money back in their business to hire employees to buy equipment and to grow. So we're gonna see some real repercussions absolutely right now another big part of the fiscal cliff is of course the federal budget -- so. Which type of small businesses are likely to suffer from any cuts there. The small businesses that depend on federal contract and -- certainly suffered the most in 2011 small businesses -- 91 billion dollars worth of federal contracts and now while that's just a drop in the bucket of what the federal government spends on find. Stuff it's still significant for the small business market. So we're gonna see those agency cuts all across the board probably the biggest obviously in defense spending. But all across the board and small businesses are telling me actually there are -- -- agencies cut back right now in anticipation. These budget pact everyone's anticipating -- -- out exactly if you do need to reduce some staff because of the clip is there any difference. Between doing it before or after December 31. Guys I hate to sound like scourge here but. Yes he really ought to do it before the end of the year just to comply with the payroll tax changes. That's costly it's complex. So if you feel like you're going to have to lay off staff which many small business owners are saying. You know I'm not only -- not going to hire but I can't keep the staff that I have in this current environment. So if you have to do it do it before the end of the year. I know it's tough to do it through the holidays but. If you're gonna have to do that you -- looks like ripping off the band -- just do it and get it over with but Tonya you need to talk to an attorney who specializes. In employment law to make sure it's handled. Properly so that you don't expose yourself to. Discriminatory charges and that you get all the proper release assigned to protect your business are all right no one wants to talk about layoffs but at least it's your dollar at least you can invite them to -- very next holiday party hopefully. Yeah I don't know I don't know how much holiday -- is going to be going around it you have to lay out your employer apparently not are you are -- -- that sort of dire mood among small business owners right now. Yes absolutely that the small business optimism as I said earlier has plummeted. It's down -- lows that we saw back in 20082009. In the height that the recession small businesses are scared and their concern. And they're just really paralyzed by fear right now that and certainly -- I talked about earlier they not only don't know what their taxes are gonna do. But if consumers have less money to spend. They can't really forecast their revenues. And they think about the ripple effect Tonya so you think about all the money that small businesses spent putting back into their communities so they won't be able to buy equipment supplies. They won't be spending money on professional services so it's just gonna keep rippling out to different levels in the in our community well let's hope -- are resolved soon as -- -- -- news small business -- -- thank you so much for joining -- Thank you.

This transcript has been automatically generated and may not be 100% accurate.

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