Congress Passes Temporary Extension of Payroll Tax Cut

Just in time for the holidays, Congress passed, and President Obama approved, a short-term extension of the Temporary Payroll Tax Continuation Act of 2011. The deal ensures that the social security withholding tax on employees stays at the current rate for the next few months.

Instead of the payroll tax reverting back to the rate of 6.2 percent, the law keeps the rate at 4.2 percent until the extension ends in March, 2012. A jump in the payroll tax rate to 6.2 percent would have equated to an average tax increase of $1,000 per year for 160 million Americans. To put it in simpler terms, the typical worker’s salary in this country would have been reduced by approximately $40 per pay period without the law.

But not all wage-earners benefit from the temporary extension. The deal includes a “recapture” provision for high-wage earning employees who receive more than $18,350 during the two month period that the law is in effect. Such high-wage earners are slapped with an additional income tax equal to 2 percent for the two month period. This recapture tax is not subject to any deductions or credits. However, the good news for these high-wage earners is that the recapture tax could be abolished when congress returns from the winter recess to negotiate a full-year extension of the payroll tax.

The deal also included several non-tax related provisions. For one, it extended the emergency federal unemployment benefits by two months to ensure that approximately 1.8 million jobless workers would not run out of benefits in January. It also extended the so called “doc fix” by delaying for two months a scheduled 27 percent reduction in payments to Medicare physicians. And to appease Republicans, the law requires President Obama to decide within the next 60 days whether he will go along with the proposed construction of the Keystone XL oil pipeline.

Employers are urged to implement the new payroll tax rate as soon as possible but not later than January 31, 2012. Any offsetting adjustments for Social Security tax over-withheld during January should also be made as soon as possible but not later than March 31, 2012. Workers need not take any action to realize the short-term cuts as employers and payroll companies are tasked with handling the withholding changes.

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