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By Catherine Gordon, Toolkit Staff Writer
After much back and forth between the Senate and the House, on December 23, 2011, Congress agreed to disagree and extend the payroll tax cut due to expire on December 31, 2011, for two months. Quickly signed into law by President Obama, the Temporary Payroll Tax Cut Continuation Act of 2011 allows the employee-share of the Social Security tax to remain at the current 2011 rate of 4.2 percent instead of reverting to 6.2 percent. The extension is valid through February 29, 2012.
For 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, reduced the employee-share of the OASDI portion of Social Security taxes from 6.2 percent to 4.2 percent for wages earned in the calendar year, up to the taxable wage base for the year (an amount adjusted annually for inflation). The employer-share of the tax was not reduced and remains at 6.2 percent. In addition, there was no reduction in the Medicare (Hospital Insurance) portion of Social Security taxes, which is 2.9 percent (1.45 percent for the employee-share and 1.45 percent for the employer-share). Therefore, for 2011, the total Social Security tax is 13.3 percent, rather than the 15.3 percent in previous years. The two-month extension maintains the status quo for the first two months of 2012.
Self-employed individuals who received the advantage of the payroll tax reduction for 2011 will continue to do so under the extension. The self-employment tax rate was reduced from 12.4 percent to 10.4 percent for the OASDI portion of tax, up to the threshold amount for 2011. The Hospital Insurance portion was unchanged and remains at 2.9 percent. Therefore, the self-employment tax rate is 13.3 percent, and that rate will remain in effect through February 2012.
Based on the passage of the extension, the IRS is instructing employers to implement the correct payroll tax rate as soon as possible in 2012, but no later than January 31, 2012. If too much Social Security tax is withheld during the month of January, the IRS expects employers to make an offsetting adjustment in a worker's pay, again, as soon as possible, and no later than March 31, 2012. The IRS plans to issue additional guidance as needed to implement the provisions of the two-month extension.
Warning. The new law contains a provision applicable to "higher-income" employees which hasn't received as much press as the payroll tax cut extension. A new recapture provision is in effect for employees who earn more than $18,350 in wages during the first two months of 2012. The provision imposes an additional income tax on these employees equal to 2 percent of the wages they receive during January and February of 2012 in excess of $18,350, up to the annual Social Security wage base of $110,100 for 2012. (The two-month earnings amount of $18,350 is based on two months of the $110,100 wage base amount for 2012). The recapture tax is in addition to income tax liability an employee would pay for 2012 and may not be reduced by credits or deductions. Payment of this tax would be made in 2013 when employees subject to the tax file income tax returns for 2012.
Congress has made a commitment to go to conference committee in an effort to extend the payroll tax cut through 2012. The final form this extension takes and what is included in the legislation around it is truly up in the air. All employers can do for the time being is follow the rules currently in place and follow the political action regarding this issue as we enter 2012.