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By Marcia Richards Suelzer, Toolkit Staff Writer
President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012 on February 22, 2012, which extends the 2-percent payroll tax holiday for an additional 10 months, through the end of 2012. This new law follows on the heels of a temporary two-month extension of the payroll tax holiday through the end of February 2012. The IRS has updated Form 941, Employer's QUARTERLY Federal Tax Return, to reflect the new law.
Under the payroll tax cut, individuals who receive wages will continue to pay Old Age, Survivors, and Disability Insurance (OASDI) taxes at a rate of 4.2 percent for calendar year 2012. This is a 2-percentage-point reduction from the 6.2 percent ordinarily paid by individuals from their take-home pay.
Employers will continue to pay their 6.2 percent share of OASDI taxes. Self-employed individuals also benefit from the payroll tax legislation. Self-employeds will pay taxes of 10.4 percent on their self-employment income (equivalent to the 4.2 percent employee's share and 6.2 percent employer's share). For 2012, the OASDI tax applies only to the first $110,100 of wages and net self-employment income received by an individual. Both the employer and the employer are still liable for their respective 1.45 percent Medicare tax. There is no income cap on this tax. Self-employed must pay a Medicare tax of 2.9 percent on their net self-employment income.
Example. The higher your wages, the more advantageous the payroll tax cut is for you. Peter earns $50,000 a year. The payroll tax holiday means he will have roughly $83 a month (or $1,000 per year) in extra take-home pay, or $1,000 a year. Peter's boss, Becky earns $150,000 per year. She will have approximately $2,200 more in her take-home pay for 2012. (This is the maximum amount that can be received because OASDI withholding stops at $110,100.)
Recapture Provision Repealed
The two-month extension included a recapture provision that would have applied to individuals who received more than $18,350 in wages during the two-month January-February 2012 period. Congress repealed this recapture provision because it was no longer necessary to preserve the overall $110,100 maximum wage cap.
Unemployment Benefit and Medicare "Doc Fix" Extended
The new legislation also includes an extension of unemployment benefits which average about $300 a week, although the benefit period will be scaled back gradually from 99 weeks to 63 weeks in most states. (States with the highest joblessness rates will have the benefit period scaled back to 73 weeks.) The legislation also includes a 10-month extension of the Medicare "doc fix." This assures providers receiving Medicare reimbursements that they will not face a scheduled 27 percent payment reduction for another 10 months.
Repeal of Estimated Tax Shift for Large Corporations
The new law also repeals prior legislation that accelerated corporate estimated tax payments for certain large corporations from one quarter into the previous quarter. None of these tax shifts has yet to take place and this law reinstates the regular payment schedule that previously applied.