After considerable debate, Congress agreed late last week to extend a payroll tax cut that will save employees hundreds of dollars over the next two months.

The Social Security tax rate for employees was lowered from 6.2 percent to 4.2 percent in 2011, and the Temporary Payroll Tax Cut Continuation Act will keep it at 4.2 percent for the first two months of 2012 – meaning employees will pay 4.2 percent tax on the first $110,100 in wages.

The employer portion of the Social Security tax remains 6.2 percent, and self-employed individuals will continue to pay both the employee and employer share (for a total of 10.4 percent). There is no change to the Medicare tax; it remains 1.45 percent for employees and employers.

The Social Security Administration recently announced an increase in the Social Security wage base, from $106,800 to $110,100. Any wages above $110,100 are not subject to the Social Security tax, but they are still subject to Medicare taxes.

Leaders of both political parties have indicated they’d like to keep the employee Social Security tax rate at 4.2 percent for all of 2012. But in case they cannot agree on another extension and the tax rate returns to 6.2 percent on March 1, the Continuation Act includes a “recapture” provision that essentially prevents high-wage earners from accelerating their income in order to have the full wage base taxed at the 4.2 percent rate. Only the pro-rated portion of the wage base – $18,350, or one-sixth of $110,100 – will be taxed at 4.2 percent, and any wages beyond $18,350 will be subject to an additional 2 percent income tax. The “recapture” will be a moot point if Congress extends the tax cut through all of 2012.

In addition to the payroll tax cut, Congress is expected to consider extensions of other tax cuts that are currently scheduled to expire December 31, including the Research & Experimentation Tax Credit, bonus depreciation and a state and local sales tax deduction. As always, we will monitor the debate and keep you abreast of any changes.

For more information on the Temporary Payroll Tax Cut Continuation Act and how it impacts your organization, contact your Barnes Dennig tax representative at (513) 241-8313.

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