Feds are expected to Approve the Payroll Tax Cut to be Extended thru 2012:Nearly 160 million workers will benefit from the extension of the 2011′s reduced payroll tax rate through the end of 2012. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through December 31, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.
As reported by BusinessWeek just moments ago:
Feb. 15 (Bloomberg) -- U.S. House Republican leaders began selling members on a tentative agreement to extend a payroll tax cut through 2012 as they seek to avoid the brinkmanship that hurt the party late last year.
“There is an agreement in principle, there are a lot of details I hope will be” completed today, House Speaker John Boehner, an Ohio Republican, told reporters in Washington this morning. He said he expects a vote on the plan this week.
What is a Payroll Tax Cut?
Payroll taxes include federal income tax withholding and FICA taxes (Social Security/Medicare taxes) withheld from employee pay and matched by employers. The payroll tax cut is a 2% decrease in Social Security costs for employees; the purpose was to stimulate spending. Before the cut, employees had to pay 6.2% of their gross pay each payday, as their portion of the Social Security Tax, withheld from their pay.
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income 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).
This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
How Will This Payroll Tax Cut Extension Affect My Company?
Your payroll clerk should have been adjusting the amount you withhold from employee paychecks to account for this 2% Social Security tax cut. This payroll tax cut will also affect how you complete Form 941 (quarterly wage and tax report) for 2012.
If you are self-employed, this payroll tax cut affects you too. Self-employed individuals can cut their self employment tax by 2% in 2012. There is nothing you need to do to get this cut; it’s reflected in the calculation of your self-employment taxes on your personal income tax return, Schedule SE.
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