YOUR PAYROLL TAX CUT IS SAFE FOR NOW!
On December 22, 2017, The Tax Cuts and Jobs Act was signed into law. The information in this article predates the tax reform legislation and may not apply to tax returns starting in the 2018 tax year. You may wish to speak to your tax advisor about the latest tax law. This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
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.
Leave a ReplyWant to join the discussion?
Feel free to contribute!