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Payroll Tax Cut Extended for at Least Two More Months/

The payroll tax cut that was in effect for 2011 was extended for another two months by a Congressional vote that took place just before Christmas. The employee share of the Social Security tax would have jumped from 4.2 percent back up to its pre-2011 rate of 6.2 percent on December 31 if federal lawmakers had not been able to reach a temporary compromise. Uncertainty remains among political analysts and payroll specialists alike as to whether the tax cut will be extended once again through the remainder of this year.

Because of the eleventh-hour nature of the compromise, some payroll administration systems may have been programmed to resume withholding from employees at the 6.2 percent rate. In these cases, the IRS advises payroll managers that they have until Jan.31 to implement the correct rate. Amounts over-withheld in January must then be paid back to employees no later than March. 31.

The continuation of the 2 percentage point reduction in the tax will result in about $83 more in monthly take-home pay in January and February for a worker earning at a rate of $50,000 annually. In 2011, the lower rate put a total of $1,000 more in such a worker’s pocket.

Highly paid employees – those who earn more than $18,350 in the first two months of the year – may eventually have to “repay” a portion of the 2 percent difference as part of their 2012 income tax liability. For those employees, a special 2 percent income tax will be levied against their January-February earnings in excess of $18,350, thus offsetting the Social Security tax savings on that portion of their income. This special 2 percent “clawback” or “recapture” tax won’t be payable until 2012 income taxes become due in 2013, and will likely be eliminated altogether if the Social Security tax cut is eventually extended through the remainder of this year.

An earlier version of the two-month extension compromise bill provided for the same effect to be accomplished through two-tiered tax withholding – a rate 4.2 percent up to $18,350, and 6.2 percent beyond that. Because of the difficulties that payroll processors would have faced in implementing such a complex withholding structure in such a short time, the National Payroll Reporting Consortium opposed this plan in a Dec. 11 letter to Congress.

Dealing with frequent changes to payroll taxes and the continual uncertainty in payroll laws can be difficult and distracting for a small business owner. Payroll outsourcing to the experts at Padgett Payroll Services relieves employers of the worry and burden of keeping up to date with these changes. Call Padgett today at (706) 548-1040 to find out more about how we can help simplify the job of running your business.

We encourage you to contact us with any questions.

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