Employee Benefits Compliance, Taxes, Fees & Penalties

Payroll Tax Cut Temporarily Extended to February 29, 2012

From the IRS Newswire, 12/23/2011:

The current two percentage point reduction in Social Security tax withholding rate (from 6.2% to 4.2%) has been extended through Feb. 29, 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011 (enacted today). 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. Since the 4.2 percent rate has been in effect since the beginning of 2011 some employers may find that no adjustment is necessary. However, since the reduced rate was set to expire as of December 31, 2011, many employers and payroll sevices have already implmented the expected change for January 2012. If any Social Security taxes are over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

New “Recapture” Provision Applies to High-Income Employees
The new law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the first two months of 2012 (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.

Future IRS Guidance Expected
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.

The IRS announcement states that nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011.