Payroll Tax Cut Extends into 2012

By Chris Bevington, CPA

The payroll tax cut, resulting in the employee portion of social security tax being reduced from 6.2% to 4.2% of wages, has been extended through February, 2012.  Congress battled right up to the Christmas holiday before coming to the two-month extension, just eight days before the payroll tax cut from 2011 was set to expire.

For all intents and purposes, it’s hard to imagine the payroll tax cut not being extended through 2012.  Both the Democratic and the Republican parties will want to avoid being blamed for increasing taxes that directly affect workers’ pay checks, especially with this being an election year.  What seems most ironic is they’re cutting funding to a program that’s already known to be struggling.

How the cost of this cut will be covered remains to be seen.  Democrats seek higher taxes on the wealthy; those with over a million-dollar incomes.  Republicans wish to make up the cost by reducing spending.  One client I talked to thinks it won’t be long until the employer is asked to pick up the “extra” 2% no longer being withheld from employees.  Then there’s always the new “recapture” provision, which applies only to employees who receive more than $18,350 in wages during the two-month extension 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 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

Nothing is set in stone, but in all likelihood it’s safe to say the two-month payroll tax cut extension will indeed be extended through 2012.  Agreeing on how the cost of the cut will be funded is another matter altogether.  Stay tuned!

Click here for February 20, 2012 Update.