Congress gave all wage earners a short-lived 2012 reprieve by temporarily extending the 2% payroll tax cut though February of 2012.

The payroll tax, frequently referred to as FICA or OASDI on your paycheck, has historically been 6.2%. This is the tax that funds the Social Security administration. For 2011, as an economic stimulus, Congress temporarily reduced the rate to 4.2%. They also provided self-employed individuals with a corresponding two percentage point reduction by lowering the Social Security portion of the SE tax from 12.4% to 10.4%.

Extending this tax cut into 2012 has been a hotly debated issue in Congress. Unable to reach a compromise, Congress has extended the 2% tax cut temporarily through February while they try to work out a solution for the balance of 2012.

This last-minute change can cause problems for some employers who were set to revert to the normal tax rate. These employers may initially withhold 6.2% of your earnings until they can correct their payroll program back to the 4.2% rate. They will then have to make a subsequent adjustment no later than January 31st to correct the over-withholding.

Odds are the cut will be continued past February. However, if this does not happen and your annual earnings exceed the $110,100 annual wage subject to the payroll tax reduction, you will be required to pay back part of the 2% reduction on the amount you earn in excess of $18,350 in January and February. Why? Because the extension legislation limits the savings to two months of income based upon the annual wage limit. Two months out of 12 equals 1/6 of the annual wage base or $18,350 (1/6 x $110,100). Because all employers are required to withhold the payroll tax at a fixed rate, any excess savings will have to be paid back on your 2012 tax return.

If you have any questions, please give this office a call.

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