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Payroll Tax Cut Extended for Two Months

By Richard Stieglitz and Martin Arking
January 31, 2012

In the final days of 2011, Congress extended the 2% tax cut for the employee portion of FICA and the self-employment tax. The tax cut was set to expire as of Dec. 31, 2011. The legislation, “The Temporary Payroll Tax Cut Continuation Act of 2011,” extends the tax break to the end of February, 2012. As a result, employees pay only 4.2% FICA on their wages and self-employed individuals pay only 10.4% on their self employment income. Congress is currently in negotiations to further extend this tax cut to the end of 2012.

Pro-Rata Limitation

The legislation also contains a pro-rata limitation on the amount of earnings eligible for the tax cut of $18,350. This represents two months of the full-year FICA limit of $110,100. The final version of the bill contains a recapture provision in which any employee who receives more than $18,350 of wages during the first two months of 2012 will be required to pay a 2% income tax surcharge on the excess with his 2012 Individual Income Tax Return. This provision will most likely be moot if the payroll tax relief is extended for the entire year.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Martin Arking is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP. The authors can be reached at 212-840-3456 or via e-mail at [email protected] and [email protected], respectively.

In the final days of 2011, Congress extended the 2% tax cut for the employee portion of FICA and the self-employment tax. The tax cut was set to expire as of Dec. 31, 2011. The legislation, “The Temporary Payroll Tax Cut Continuation Act of 2011,” extends the tax break to the end of February, 2012. As a result, employees pay only 4.2% FICA on their wages and self-employed individuals pay only 10.4% on their self employment income. Congress is currently in negotiations to further extend this tax cut to the end of 2012.

Pro-Rata Limitation

The legislation also contains a pro-rata limitation on the amount of earnings eligible for the tax cut of $18,350. This represents two months of the full-year FICA limit of $110,100. The final version of the bill contains a recapture provision in which any employee who receives more than $18,350 of wages during the first two months of 2012 will be required to pay a 2% income tax surcharge on the excess with his 2012 Individual Income Tax Return. This provision will most likely be moot if the payroll tax relief is extended for the entire year.

Richard H. Stieglitz, CPA, a member of this newsletter's Board of Editors, is a Tax Partner and Martin Arking is a Tax Manager in the New York accounting firm of Anchin, Block & Anchin LLP. The authors can be reached at 212-840-3456 or via e-mail at [email protected] and [email protected], respectively.

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