IRS, Payroll


In our January 2011 Newsletter, we wrote an article called The 2% Solution about the one-year 2% reduction in Social Security Taxes.   This tax break was recently extended into the first two months of 2012. According to our friends at the IRS:

Nearly 160  million workers will benefit from the extension of the reduced payroll tax rate  that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act  of 2011 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 Feb. 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 Jan. 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.

Employers and  payroll companies will handle the withholding changes, so workers should not  need to take any additional action.

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 percent 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.

The IRS will  issue additional guidance as needed to implement the provisions of this new  two-month extension, including revised employment tax forms and instructions and  information for employees who may be subject to the new “recapture” provision. For most employers, the quarterly employment tax return for the  quarter ending March 31, 2012, is due April 30, 2012.

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