Congress Passes Temporary Payroll Tax Cut Extension

The reduced 4.2% Social Security tax rate will remain in effect at least through February.


The Senate and the House of Representatives on Friday both agreed by unanimous consent to extend the reduced rate, and President Barack Obama signed the bill—the Temporary Payroll Tax Cut Continuation Act of 2011 (H.R. 3765)—the same day. The reduced rate had been scheduled to end after Dec. 31.


In the new year, a conference committee of representatives and senators will be appointed to discuss extending the reduced rate for the rest of 2012.


The employee portion of the Social Security tax was reduced from 6.2% of the first $106,800 of wages to  4.2% for 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111-312. The employer portion remained at 6.2%. Under the law enacted Friday, the 4.2% rate is extended through Feb. 29, 2012.


The act provides special rules for 2012 so that taxpayers with self-employment income and income from employment in excess of $18,350 (one-sixth of the 2012 Social Security wage base of $110,100) do not receive an extra benefit. If a full-year extension of the payroll tax cut is not enacted, taxpayers with income from employment for January and February that exceeds $18,350 will be required to recapture the excess benefit they receive. The recapture provision was included instead of a cap on the amount of employment income because of the compliance difficulties that would cause employers.


Because the extension affects withholding and was enacted only a little over a week before the higher payroll tax was scheduled to go into effect, it is not clear how well employers and payroll companies will be able to handle that change. The IRS on Friday notified employers that they should implement the lower payroll tax rate as soon as possible in 2012, but not later than Jan. 31 (IR-2011-124). The IRS also said that if an employer overwithholds during January, it should make an offsetting adjustment in workers’ pay as soon as possible, but not later than March 31, 2012. The IRS also said that it will issue more guidance on implementing the provisions of the two-month extension, including revised employment tax forms and information for employees who may be subject to the recapture provision.


The act also extends certain unemployment benefits and blocks a cut in Medicare payments to doctors.


Congress’ use of unanimous consent to approve the extension allowed it to send the bill to the president without requiring lawmakers who had left the capital to return to Washington.


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