Congress Approves Bill Temporarily Extending the Payroll Tax Cut
Richard W. Wojciechowski, CPA

In our December issue of the Focus, I had made the prediction that the House Democrats and Republicans would not be able to reach a compromise on extending the 2% payroll tax cut. I was wrong! Sort of. Late on December 22, House and Senate leaders agreed to end their stalemate over extending the payroll tax break. Under the agreement, for the first two months of 2012, a 4.2% Social Security tax would continue to apply to workers' pay (10.4% OASDI tax for self-employment income).

However, the agreement calls for new language to be inserted into the tax relief bill to prevent a potential payroll tax problem for employers. According to information provided by the House Ways & Means Committee, the revision would allow employers to withhold employee payroll taxes at 4.2% (instead of 6.2%) on all wages paid during the two-month extension period, subject only to the full 2012 wage base ($110,100) and without regard to the $18,350 cap (two-twelfths of the wage base of $110,100) on wages earned through the end of February, 2012. If an employee's wages during the first two months of 2012 exceed $18,350, and the payroll tax reduction is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the worker's individual tax return for 2012.

Both the Senate and House approved the bill on the morning of December 23. It will now be sent to President Obama for his expected signature.

This temporary extension buys time for negotiations early next year, on how to finance a year-long extension of the 2 percentage point Social Security payroll tax cut. It will keep in place a salary boost of about $20 a week for an average worker making $50,000 a year, and prevent almost 2 million unemployed people from losing jobless benefits averaging $300 a week.

Under the agreement, both Republicans and Democrats in the Senate and House will immediately appoint negotiators to a conference to forge a full-year extension of the payroll tax reduction. Much like a scaled down version of the "Super Committee". Let's hope they achieve that goal to remove the uncertainty that businesses will face in administering their 2012 payroll.

As more details unfold from these talks from the two sides, the GKE Tax Practice Group will gather the facts and keep you updated.

Contact Richard Wojciechowski, CPA with any questions you may have on how the current tax rules may apply to you at 716.250.6600, or by email at rwoj@gkecpa.com.

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