Congress Passes Payroll Tax Cut Extension

Congress Passes Payroll Tax Cut Extension

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Congress Passes Payroll Tax Cut Extension

February 20, 2012

After weeks of uncertainty, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012 (“the 2012 Act”) on February 17, 2012. The Act extends the employee side payroll tax cut through the end of 2012. President Obama is expected to sign the bill as soon as it reaches the White House.

Brief History of the Payroll Tax Cut

The payroll tax cut was originally enacted as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“the 2010 Act”), which was signed by the President on December 17, 2010. Under this Act the employee portion of rate for Old Age, Survivors, and Disability Insurance (“OASDI”) was changed from 6.2% to 4.2%. The OASDI tax rate for self-employed individuals was reduced by 2% as well.  The reduction in the rate was originally effective for 2011 only.

On December 23, 2011, President Obama signed the Temporary Payroll Tax Cut Continuation Act of 2011 (“the 2011 Act”). This Act extended the payroll tax cut for the first two months of 2012.

Recapture Repealed

The 2011 Act included a recapture provision (now repealed), which was intended to apply to individuals who received more than $18,350 in remuneration in January and February 2012. The recapture tax would have been payable in 2013 when the individual filed his or her income tax return for the 2012 tax year.

As anticipated, the 2012 Act includes a full repeal of the recapture provision.

Impact and Comments on the Future of the Payroll Tax Cut

The Joint Committee on Taxation has estimated that approximately 170 million wage earners and self-employed individuals will benefit from the extension of the payroll tax cut.  The White House figures that the extension protected taxpayers from seeing on average a $1,000 decrease in take-home pay in 2012.

Concerning the future of the payroll tax cut, on February 16, 2012, Treasury Secretary Timothy Geithner told the Senate Budget Committee that he does not anticipate the payroll tax cut would be extended for a third year (into 2013).  Geithner told the Senate Budget Committee: “This has to be a temporary tax cut.  I don’t see any reason to consider supporting its (further) extension.”

Rick Woods, CPA, Tax Manager