Congress passes payroll tax cut extension through 2012
On February 17, Congress passed H.R. 3630, the “Middle Class Tax Relief and Job Creation Act of 2012” (the Act) and the President has signed it into law. The Act extends the 2-percentage-point payroll tax cut through the end of 2012, and also repeals a number of estimated tax shifts for large corporations. Employers will now be able to better plan for payroll tax compliance
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors and Disability Insurance (OASDI; commonly known as the Social Security tax), and the other for Hospital Insurance (HI; commonly known as the Medicare tax). For remuneration received during 2011 the “payroll tax holiday period,” namely calendar-year 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the employee OASDI tax rate under the FICA tax by two percentage points from 6.2% to 4.2%. Similarly, for self-employment income for tax years beginning in 2011, the Act reduced the OASDI tax rate under the SECA tax by two percentage points from 12.4% to 10.4%.
In December of 2011, when Congress couldn’t agree on how to fund a full-year extension of the payroll tax cut that applied for 2011, it passed the “Temporary Payroll Tax Cut Continuation Act of 2011” providing for a two-month extension of the payroll tax cut that applied for 2011, and a parallel extension of a lower SECA tax rate on self-employment income. More specifically, under the TTCA, the reduced employee OASDI tax rate of 4.2% under the FICA tax, and the equivalent employee portion of the RRTA tax, was extended to apply to covered wages paid in the first two months of 2012. The TTCA also provided for recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate, and the equivalent employee portion of the RRTA tax, for remuneration received during the first two months of 2012 in excess of $18,350 (i.e., two-twelfths of the 2012 wage base of $110,100). The recapture would have been accomplished by a tax equal to 2% of the amount of wages (and railroad compensation) received during the first two months of 2012 that exceed $18,350. The recapture provision would have applied only if the temporary payroll tax cut terminated on Feb. 29, 2012.
For tax years beginning in 2012, the TTCA also provided that the OASDI rate for a self-employed individual remained at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower OASDI rate for 2012).
The new law provides that the “payroll tax holiday period” is now extended for calendar years 2011 and 2012. Thus, the 2-percentage point payroll tax reduction and the 2-percentage point reduction in the OASDI tax under the SECA tax for the self-employed will apply through Dec. 31, 2012. As a result, for 2012, employees see a reduction in their payroll taxes to 4.2% on wages up to $110,100 (wage base for 2012) and self-employed individuals will pay only 10.4% Social Security self-employment taxes on self-employment income up to $110,100. This will result in the maximum savings for 2012 will be $2,202 (2% of $110,100) per taxpayer. If both spouses earn at least as much as the wage base, the maximum savings will be $4,404.
As a result of this new law, the Act repeals the TTCA recapture provisions applying to taxpayers with wages exceeding $18,350 over the first two months of 2012. The IRS has issued new 941 forms for the year 2012 as well as working on releasing the 2012 W-2 with language that will reflect this tax cut.
The new law also extended unemployment benefits for those who have been unemployed for more than the standard 28 weeks.