Payroll Tax Cut Extension

Posted by: Carrie Minnich

Congress passed a two-month payroll tax cut extension at the end of December. The extension continues through February 29, 2012 the reduced payroll tax rate for employee Social Security of 4.2 percent that has been in effect for 2011. The lower rate; however, only applies to the first $18,350 of an employee’s wages. $18,350 is two-twelfths of the Social Security wage base of $110,100. This prevents the shifting of salary to the first two months of the year to take advantage of the lower rate. An additional income tax equal to 2 percent of the amount of wages over $18,350 but limited to $110,100 is imposed for those employees earning more than $18,350 in the first two months. The additional income tax would be recaptured on the employee’s 2012 individual tax return if the payroll tax cut is not extended for the remainder of 2012.

We will have to wait until the lawmakers return from their holiday recess to see if agreement can be reached to extend the payroll tax cut through the rest of 2012.