United States Gets Just Two-Month Extension on Payroll Tax Cut
On December 23, 2011, U.S. President Barack Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 20111 which extends through February 2012, the 2-percent payroll-tax reduction that was set to expire on December 31, 2011. The United States Congress is expected to take up once again the debate on a full-year extension of the payroll tax cut.
U.S. Social Security tax is imposed on both the employer and employee. The tax is composed of two parts: (i) the old age, survivors, and disability insurance (“OASDI”) tax equal to 6.2 percent of covered wages up to the taxable wage base ($110,100 for 2012), and (ii) the Medicare hospital insurance tax amount equal to 1.45 percent of covered wages. In 2011, the employee portion of the OASDI tax was reduced from 6.2 percent to 4.2 percent,2 while the employer portion remained at 6.2 percent. Now, the reduced employee rate of 4.2 percent is extended through February 29, 2012.
Special rules for 2012 were added to prevent taxpayers with higher incomes (or workers able to accelerate a large amount of wages into the first two months of 2012) from receiving the maximum benefit from the payroll reduction in just two months. If a full-year extension of the payroll tax cut is not enacted, taxpayers with income for January and February that exceeds $18,350 (two-twelfths (2/12) of the 2012 Social Security wage base of $110,100) will be required to recapture 2 percent of any wages received during the two-month period in excess of $18,350 (and not greater than $110,100) on their 2012 income tax return.
The IRS announced3 that employers should implement the extension of the reduced payroll tax rate as soon as possible in 2012, but not later than January 31, 2012. Any Social Security tax over-withheld during January should be remedied by an offsetting adjustment in the worker’s pay as soon as possible, but not later than March 31, 2012.
The IRS will issue additional guidance as needed to implement the provisions of the two-month extension, including revised employment tax forms and information for employees who may be subject to the recapture provision.