On December 23, 2011, President Obama signed legislation that extends the 2% payroll tax holiday that was enacted by the 2010 Tax Relief Act that was set to expire on December 31, 2011.
2-Month Payroll Tax Cut Extension
- Extends the 2% reduction of OASDI (6.2% to 4.2%) for both employees and self-employed individuals for two months.
- Conference committee appointed to take up negotiations after New Year's Day on how to fund a full-year tax cut.
2-Month Extension of Unemployment Benefits
- Emergency federal jobless benefits extended for two additional months.
Employers should implement the new payroll tax rate as soon as possible in 2012, but not later than January 31, 2012. For 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.
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount).
This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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