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Payroll Tax Cut Extended
– January 16, 2012
Good news for nearly 160 million workers. The 2 percent payroll tax reduction that has been in place for all of 2011 will be extended for an additional two months in 2012. On December 23, 2011 President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011. This act will continue for two months (through February 29, 2012) the reduction of employees’ Social Security tax withholding from 6.2 percent down to 4.2 percent. This reduced Social Security withholding will have no effect on employees' future Social Security benefits.
Employers and payroll companies should handle the withholding changes so that employees will not need to take any action themselves. The IRS has instructed employers to implement the payroll tax reduction as soon as possible but no later than January 31, 2012. Any taxes over-withheld from an employee in error are to be adjusted in the employees' future pay as soon as possible, but not later than March 31, 2012.
The extension in 2012 contains another provision that may be a surprise to many higher income individuals. Under the terms of the new law, there will be a “recapture” provision which will only apply to those individuals who receive more than $18,350 of wages during the two month extension period in 2012. The $18,350 wage amount represents two-twelfths of the annual Social Security wage base for 2012 of $110,100. A 2 percent recapture tax will be imposed on any wages in excess of $18,350 (but not greater than $110,100) received in the two month period in 2012.
The recapture tax will be an additional add-on income tax liability paid by individuals on their 2012 individual income tax returns filed in 2013. This add-on tax is not subject to reduction by credits or other deductions.
All of this could be further complicated if Congress were to decide to make the tax cuts retroactive to January 1, 2012 and effective the entire year of 2012. If this were to happen it would require that employers refund to employees any over-withheld payroll taxes prior to the full year extension of the tax cuts. This will cause added complexity for employers filing quarterly payroll tax returns and delays for employees receiving a refund of over-withheld taxes.
Congress seems to have a way of making tax policy as complicated as possible, so we have most likely not heard the last on this matter. Stay tuned!
Mark. D. Eldredge, CPA
Partner
Heard, McElroy & Vestal, LLC
318-429-2030
meldredg@hmvcpa.com
Mark has 25 plus years of tax and accounting experience with a concentration in state tax issues. Mark joined Heard, McElroy & Vestal in 1982 and is currently Partner-In-Charge of the firm's Accounting Services Department.
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