Payroll Tax Cut Extended

Stan Rose, Managing Director, Tax Practice
February 2012

Today Congress passed a 10-month extension of the 2% payroll tax cut that previously was renewed last December and scheduled to expire at this end of this month.  President Obama is expected to sign the bill as early as today.  This move meets the administration’s goal of leaving more money in the pockets of employees, but it also helps avert a recordkeeping and payroll implementation nightmare on the part of employers and payroll processers, who anticipated a possible March 1, 2012 reversion to the old rules.  Although this issue has received significant press (both in recent days and last December when it last was renewed), following is a very brief background.

Generally, Social Security taxes are withheld from employee wages at a rate of 6.2% of the first $110,100 (for 2012) in taxable wages.  An additional 1.45% of Medicare tax is withheld from all wages, with no ceiling.  An employer must match both of those amounts, dollar for dollar, from its own coffers.

Last year, however, the employee’s share of Social Security tax withholdings was reduced by 2% to 4.2%, thereby increasing “take-home pay” for all employees.  The employer’s “match” is not affected, and remains at 6.2%.  Individuals who are self-employed remit a double share of Social Security taxes, essentially acting as both employee and employer.  They, too, participate in this tax cut by receiving a single 2% decrease.

By example, an employee earning wages of $50,000 will gain take-home pay of $1,000 as a result of this reduced rate.

This benefit was scheduled to expire on December 31, 2011, and I suspect many of us have not forgotten the unfortunate Congressional bickering that eventually resulted in a 2-month extension until February 29, 2012.  The recent negotiations were much more amicable, and extended this benefit through the end of this year.

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