The Internal Revenue Service plans to issue additional guidance on the temporary two-month extension of the payroll tax cut, including how a new “recapture” provision for high-income employees will be implemented.
The tax cut extension was passed by Congress on Friday and signed into law by President Obama later that day, with plans to return in January to find a way to agree on how to pay for extending the tax cut through the rest of the year (see Congress Passes 2-Month Payroll Tax Cut Extension). The IRS said Friday that nearly 160 million would 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, the IRS noted. The tax cut extension is paid for with an increase on the guarantee fee paid by lenders on all new mortgage loans whose principal and interest are backed by Fannie Mae and Freddie Mac.
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Employers should implement the new payroll tax rate as soon as possible in 2012, but not later than Jan. 31, 2012, the IRS advised. 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 said it would closely monitor the situation in case future legislation changes the recapture provision.
The IRS said it would also 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 legislation passed by Congress on Friday includes some technical corrections to address the concerns of payroll processors and small businesses about how the two-month extension would work (see House Republicans to Offer 2-Month Payroll tax Cut Bill). It corrects a flaw in the Senate provision by allowing employers to withhold employee payroll taxes at the reduced rate (4.2 percent) on all wages paid during the two-month period, subject only to the full 2012 wage base ($110,100) and without regard to the new $18,350 cap on wages earned through the end of February.
If an employee’s wages during the first two months of 2012 exceed $18,350 (two-twelfths of the wage base of $110,100), an amount equal to 2 percent of those excess wages would ultimately be recaptured on the worker’s individual tax return for 2012. However, this rule would only apply if the payroll tax reduction is not extended for the remainder of 2012, and a conference committee is expected to convene soon in order to negotiate a full-year extension.
11 Comments
The main reason for these Draconian results is the recalcitrant Republican majority in congress. It is virtually impossible to legislate meaningful and helpful law while the Republicans are Hell-Bent on their primary goal----destroying this Presidency.
To clarify a comment made by another contributor to this site, the shortfall in funding Social Security will be made of either by reimbursement from the general funds; fees on stock transactions; or a surtax on the wealthy. I prefer a surtax on the wealthy; it is they who have benefitted outlandishly for several decades. The government and the society that made possible their enrichment deserves repayment of at least a portion of the disproportionate "entitlement" as disgorgment.
Posted by: sag | December 30, 2011 12:22 PM
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the only way to make the system more fair is to institute a Corporate AMT so Corporations cant deduct their way below lets say 25%. The middle class pays ALL the taxes, cant take advantage of credits for wealthy or poor, needs Social security, needs unemployment, needs higher educational tuition help, needs veterans benefits, etc etc. Just like the middle ages.
Posted by: WOLFSOHN | December 29, 2011 9:52 AM
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Why even bother to give the tax break if you have to recapture it.
Just opt out and be done with this paperwork shuffle which is the only thing they are good for.
VOTE THESE JERKS OUT OF OFFICE.
Posted by: Lenore | December 29, 2011 5:07 AM
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One other idea more "brilliant" than this one would be to keep extending AMT week-by-week, and do so retroactively, and only for some weeks and not others.
Posted by: mariaku | December 28, 2011 4:00 PM
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Another excellent reason for us to vote next year and to convince everyone we know to vote these scoundrels out. They are crowing about the tax "reduction" that they passed before heading on vacation (in Hawaii, for some) when they really passed another tax on "the rich" and wrapped it up in a PR bonanza. Pathetic. Do they really think that we are so dumb?
Posted by: dmaterne | December 28, 2011 9:33 AM
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Clearly, we have 'elected' a bunch of idiots that are clueless about what they are doing.
Posted by: cstevens | December 28, 2011 9:14 AM
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Sheer nonesense, as usual. I mean really, this must be a really bad joke!
Posted by: guillemain | December 27, 2011 1:47 PM
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Way to go Congress. To extend a bill for two months only and then to add a "recapture provision" to the bill is pure brilliance on your behalf. You just do not care about the recordkeeping you force onto businesses do you? Do your jobs and pass something meaningfull. Why come back and address the same issue over and over again or is that job security? Heck, you do it every year with the AMT. Show some guts and do what is right for once.
Posted by: equigs | December 27, 2011 10:23 AM
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Let me get this straight. If an employee has wages in excess of $18,350 in the first two months of 2012, they will have to pay back, via their tax return, the additional 2% social security tax decrease available to all wage earners. Seems like someone just socked the "1%." AND, what a nightmare it wil pose on W-2s for 2012; breaking out the earnings for the first two months from the total for the year!!! Nice job Congress! djb :~(((
Posted by: DJBradach | December 27, 2011 8:33 AM
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To those of us who prepare quarterly reports this is a nightmare! Two months - why not three? Recapture - OMG!
Posted by: debbiebearden | December 27, 2011 7:59 AM
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Quote from this article "The reduced Social Security withholding will have no effect on employee's future Social Security benefits. the IRS noted." I have a hard time seeing that while employees PUT LESS INTO THE SYSTEM FOR 2 YEARS AND 2 MONTHS that it will NOT effect the amount of the annuity benefits paid when one reaches age 62 or 66.
Posted by: StevenDavis216 | December 27, 2011 7:53 AM
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