The 2011 Payroll Tax Cut Has been Extended for the First Two Months of 2012
On December 23, 2011 Congress passed, and President Obama signed into law, H.R. 3765, the "Temporary Payroll Tax Cut Continuation Act of 2011". This act provides for a two month temporary extension of the 2% payroll tax reduction for the employee's contribution towards social security tax that was in place for all of 2011.
Before the passage of this act, the employee's contribution to social security tax was set to rise to 6.2% effective for payroll paid after December 31, 2011. This had been reported in the press as a "tax increase" rather than the end of a "tax reduction" which was originally passed in December of 2010. The expiration of this tax reduction would have resulted in a return to the normal employee SS tax rate of 6.2% which had been in place for many years. The new act provides a two month reprieve from the return to the normal rate.
Please note this reduction only applies to the employee's share of the social security tax. The employer's share remains at the full rate of 6.2% for social security, similar to 2011. Also, both the employee and employer rate for Medicare tax remains unchanged at 1.45%.
The extension of the reduction will also apply to the self-employment tax rate for self-employed individuals. This extension will make the effective self-employment tax rate equivalent to 13.3% for the first two months of earnings in 2012.
Since the new act only provides for a two month extension, it also provides for recapture provisions, which would only be effective in the event that Congress is unable to pass an extension for the remainder of 2012. Since we are uncertain as to the passage of an extension, we will not go into the details of the recapture provisions at this time.
IRS has issued instructions to employers to implement the new payroll tax rate as soon as possible in 2012, but not later than Jan. 31, 2012. If there is any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers' pay as soon as possible, but not later than March 31, 2012.
Effective date:The above changes are effective for remuneration paid during the months of January and February of 2012. This means that the reduced rate will apply for pay dates that fall between January 1, 2012 and February 29, 2012.
Please contact your Herbein + Company, Inc. advisor for any questions.