The Temporary Payroll Tax Cut Continuation Act of 2011

January 2012 

 According to the Internal Revenue Services (IRS), a few items to keep in mind related to this two-month payroll tax cut extension legislation include:

• Due to the lateness in enacting this extension for the 2012 calendar year, employers should implement the new payroll tax rate as soon as possible in 2012, but no later than January 31, 2012.
• For any Social Security tax over-withheld during January 2012, employers should make an offsetting adjustment in workers' pay as soon as possible, but no later than March 31, 2012.
• Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.
• Under the terms negotiated by Congress, the law also includes a new "recapture" provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period. (The Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount.) This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100). This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012, and it is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
• The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new "recapture" provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.
• This reduced Social Security withholding will have no effect on employees' future Social Security benefits.

For more information about the Temporary Payroll Tax Cut Continuation, please view the following links:

• Explanation of the revenue provisions in this legislation from the Joint Committee on Taxation in Congress
• IRS Release (IR 2011-124) on the legislation

If you have any questions, please contact your Kolb+Co. adviser or Jim Brandenburg.