Payroll Tax Cut Temporarily Extended into 2012

Congress recently passed and the President signed the Temporary Payroll Tax Cut Continuation Act of 2011.This act temporarily extends the two percentage point payroll tax cut for employees by continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012. The IRS states” that nearly 160 million workers will benefit from the extension of this reduced tax and that this will have no effect on employees’ future Social Security benefits.” Employers should implement the new payroll tax rate as soon as possible in 2012 but no later than Jan. 31, 2012.An employer that inadvertently over-withholds in January should correct for this, again as quickly as possible, but not later than the end of March. The law also includes a “recapture” provision, which applies to employees who earn more than $18,350 during the two-month period of January and February 2012. The provision imposes an additional income tax on these employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350, and not greater than $110,100. The IRS notes that the Social Security wage base for 2012 is $110,100; $18,350 represents two months of this amount. This recapture is an additional income tax liability for these employees for 2012, and can’t be reduced by credits or deductions, the IRS says. It will be payable in 2013, when the employees file their 2012 tax returns. The recapture appears to be a way to address concerns about effectively administering the tax cut extension, while also ensuring that highly compensated employees didn’t benefit from a two-month extension more than lower-paid employees. Of course, all this legislation over the “recapture” provision could be unnecessary if the extension is extended again through the end of 2012.

Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has  recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.

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