Congress Extends 2% Payroll Tax Cut through 2012

Following a two-month extension that was set to expire at the end of February, Congress has approved a continuation of the two percentage point cut in the employee portion of the payroll tax through 2012, along with an extension of Federal unemployment benefits and a continuation of the Medicare "doc fix." The Middle Class Tax Relief and Job Creation Act of 2012 was signed into law by President Obama on February 22, 2012.

Under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the employee share of the Social Security tax had been lowered from 6.2% of the first $106,800 of wages to 4.2% for 2011 only. After this year-long reduction, the payroll withholding for employees had been scheduled to revert to the normal rate of 6.2% on January 1, 2012. Under the Temporary Payroll Tax Cut Continuation Act of 2011 passed in December 2011, the 4.2% rate for employees was extended through February 29, 2012. Following the passage of the new law, the employer portion of the payroll tax will remain at 6.2%, while the self-employed rate will be 10.4% through the end of the year. For 2012, those rates apply to the first $110,100 of wages. The most recent legislation also includes a provision that prevents a scheduled payment cut for physicians who treat Medicare patients from taking effect through the remainder of 2012, and an extension through the end of the year of emergency Federal unemployment benefits. However, the maximum number of weeks that an individual may claim unemployment benefits was lowered from 99 to 73 weeks in states with particularly high unemployment, while in most states benefits will eventually be capped at 63 weeks.

Because the new law extends the 4.2% rate through the end of 2012, a recapture provision included in the temporary extension will not take effect. Under that rule, employees who earned more than $18,350 during January and February, or one-sixth of the 2012 Social Security wage base of $110,100, would have been required to pay an additional income tax in an amount equal to 2% of the wages they received during the two-month period in excess of $18,350. This provision, which was designed to ensure that high-income workers were not able to claim the tax cut on all of their taxable wages while other workers were not, would only have applied if the payroll tax reduction had not been extended through the end of 2012.

According to the Joint Committee on Taxation, the extension of the payroll tax will cost $93 billion in revenue, while the extension of unemployment benefits and the delay in Medicare reductions will cost more than $50 billion. The cost of these provisions will be covered in part by an increase of 2.3% in Federal employees' pension contributions for employees joining the Federal service after December 31, 2012, and by the reduction of certain health care funds and programs. The law also calls for the Federal Communications Commission (FCC) to raise revenue through voluntary incentive auctions of the spectrum of public airwaves, currently used by television broadcasters, to wireless broadband service providers. The auctions are projected to generate $25 billion in revenues.

The legislation further repeals accelerations in estimated tax payments for corporations with assets of $1 billion or more that had been scheduled to take place in the third quarters of 2012, 2014, 2015, and 2019.

For more information about the Middle Class Tax Relief and Job Creation Act of 2012, contact one of our qualified tax professionals.