In 2011, American taxpayers enjoyed a temporary reduction in Social Security taxes. For what was supposed to be one year only, taxpayers only paid 4.2% in payroll taxes, a 2% reduction from the normal 6.2% rate.
But just before that tax break was about to expire, Congress passed a last-minute short-term extension. The payroll tax cut no longer expires on December 31, 2011 – it is now good through February 29, 2012. It is estimated that approximately 160 million United States taxpayers will benefit from this stimulus measure.
Extended Payroll Tax Holiday – Who Qualifies for Lower Social Security Taxes? And Exactly How Much?
Everyone who pays Social Security taxes is eligible for this tax break. In IRS Newswire Issue Number IR-2011-124, the IRS included confusing language about a “recapture” provision for high income taxpayers included in the extender bill. I won’t go into that here, but if you are so inclined, you might want to read about in my post Confused by the “Recapture” Provision of the Temporary Payroll Tax Cut Continuation Act of 2011? Me, Too!
In a nutshell, if you make less than $110,100 in 2012, you will receive the Social Security tax cut. As noted on the White House blog, this equates to roughly $40 bi-weekly for someone making $50,000 per year.
In other words, you would get to keep an extra $1,000 on a salary of $50,000 per year ($50,000 x 2% = $1,000). This means an extra $19.23 per week. Someone making $75,000 per year would keep an extra $1,500 total, and someone making $100,000 per year would keep an extra $2,000 total.
2012 Temporary Social Security Tax Cut Details – Actual Text of the Bill
The 2% Social Security tax cut extension is included in the Temporary Payroll Tax Cut Continuation Act of 2011, or H.R. 3765. The actual text of H.R. 3765 can be retrieved from the Library of Congress (see preceding link).
2012 Employee Payroll Taxes – Lower Social Security Tax Withholding, Not a Tax Credit
The responsibility of implementing (or continuing) the 2012 payroll tax holiday falls on employers. Instead of withholding 6.2% for Social Security, employers should only withhold 4.2% from employee paychecks. As such, employees should keep in mind that this tax break will come in the form of more take-home pay, not a tax credit on a 2012 tax return.
Due to the last-minute nature of this extender bill, employers have until January 31, 2012 to implement the necessary system changes to withhold the proper amount of payroll taxes. However, any incorrectly withheld taxes due to late implementation must be corrected by March 31, 2012.
Employees need not do anything to effect the change unless they suspect the incorrect is being withheld from their paychecks, keeping in mind that companies have until January 31, 2012 to implement the changes and until March 31, 2012 to credit back any incorrect withholding.
Obama to Congress: Don’t Let Social Security Tax Rates Revert Back in March 2012
Because the payroll tax holiday is only temporarily extended through the end of February 2012, the American public can expect another debate to ensue shortly over whether the extension should be continued through the end of 2012. President Obama is pushing for the full year extension, but in an election year, things like this aren’t very predictable.
The government granted this tax relief with the promise that future Social Security won’t be impacted as a result; however, the 2% break comes directly from the funds that would have otherwise been collected to fund Social Security. If this tax cut is continually extended, it will add to an already contentious debate over what to do about the future of Social Security.
Keeping that in mind, and weighing it against the fact that 2012 is an election year, it really is anyone’s guess as to whether this tax cut will be extended again.
- Congress Passes Two-Month U.S. Payroll Tax Cut Extension by Laura Litvan and Greg Giroux. Retrieved from Bloomberg.com on 12.23.11.
- Obama Signs Payroll Tax Cut Extension by Alan Silverlieb. Retrieved from cnn.com on 12.23.11.
- Payroll Tax Cut Temporarily Extended into 2012 (IR-2011-124). Retrieved from irs.gov on 12.23.11.
- The Temporary Payroll Tax Cut Continuation Act of 2011 (H.R. 3765).