Press Room: Tax Release

January 03, 2012

Payroll Tax Cut Remains in Effect Until February 2012

The Temporary Payroll Tax Cut Continuation Act of 2011 retains the 4.2% Old Age, Survivors and Disability Insurance (OASDI or Social Security tax) rate paid by employees through February 2012. The employer’s tax rate remains at 6.2%. The reduced rate will apply to covered wages paid during such two-month period. This means that individuals who do not receive wages until after February 2012, do not receive the benefit of the reduced rate unless the 4.2% rate is extended beyond February 2012.

To the extent that an individual receives a benefit of the reduced rate on wages in excess of $18,350 during January and February 2012, the individual will be subject to a recapture tax. The $18,350 is equal to two-twelfths of the 2012 wage base of $110,100. The recapture is accomplished by a tax equal to 2% of the amount of wages received during the first two months of 2012 that exceeds $18,350. This recapture tax will be paid when the individual files his or her 2012 Form 1040 and is not subject to reduction by credits or deductions. If, however, the payroll tax cut is extended through the end of 2012, the recapture tax would not apply.

The OASDI rate for a self-employed individual remains at 10.4% for self-employment income of up to $18,350. For self-employment income in excess of $18,350 and up to $110,100, the OASDI rate is 12.2%. The income tax deduction allowed for the OASDI portion of the 2012 self-employment tax paid is computed at the rate of 59.6% of the OASDI tax paid on self-employment income of up to $18,350 and for self-employment income in excess of this amount, the deduction is equal to half of the OASDI portion of the self-employment tax paid.

According to IRS, employers should implement the new payroll tax rate as soon as possible in 2012, but no later than January 31, 2012. If an employer over-withholds Social Security taxes during January 2012, the employer should make an offsetting adjustment in the affected workers’ pay as soon as possible, but no later than March 31, 2012.