Both houses of Congress passed a bill last Friday that will extend the 2 percent payroll tax cut through 2012, ending months of debate and saving hundreds of dollars for employees.

Payroll Tax Relief Extension

The employee portion of the payroll tax was reduced from 6.2 percent to 4.2 percent in 2011, then extended through February 2012. The new bill, which President Obama is expected to sign into law, will extend the 4.2 percent rate through December 31.

Employees will pay 4.2 percent on the first $110,100 of wages. Employers will continue to pay 6.2 percent on the first $110,100 of each employee’s wages, and the self-employed will be responsible for both the employee and employer portions (a total of 10.4 percent of the first $110,100).

The bill, called the Middle Class Tax Relief and Job Creation Act of 2012, also extends certain unemployment benefits and blocks a cut in Medicare payments to doctors. The payroll tax cut is expected to save the average American worker around $1,000 in 2012. The Congressional Budget Office estimates that it will cost the government $93 billion in lost tax revenue.

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