Payroll Tax Cut Temporarily Extended into 2012

On December 23, 2011, the House and Senate finally reached agreement on a short term extension of the payroll tax cut. The short term payroll tax cut extension will now expire at the end of February 2012. The parties were unable to reach the hoped for one year extension agreement.

The President pushed hard for this extension arguing that withholding taxes would otherwise rise for the average American family right after the holiday season. If the provision was not extended, the typical family making $50,000 a year would have had about $40 less to spend or save with each paycheck.

Now, under the agreement, nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that began in 2011. Known as The Temporary Payroll Tax Cut Continuation Act of 2011, the Act temporarily extends the two percentage point payroll tax cut for employees, 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. (This reduced Social Security withholding 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 not later than January 31, 2012. Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.

A recapture provision applies to employees who receive more than $18,350 in wages during the two-month extension period, in the event the rate reduction is not further extended.

The IRS will issue guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions.

While this extension is good news for affected wage earners, the short-term nature of this act, and the fact that additional legislation is most likely forthcoming before it sunsets, makes compliance and long-term planning for both employees and employers more complex and uncertain.

Should you have any questions how this payroll change may affect you or your business, please contact your Marcum Tax Professional.