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President Signs Two-Month Payroll Tax Cut Extension
'Recapture' provision applies to those receiving more than $18,350 over two months

By Stephen Miller, CEBS  12/23/2011
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A payroll tax cut extension through February 2012 was passed by Congress and signed by President Barack Obama on Dec. 23, 2011.

The Temporary Payroll Tax Cut Continuation Act of 2011 extends the 2 percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012.

"Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012," according to an alert issued by the Internal Revenue Service, which advised, "For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012."

Congressional efforts are expected to resume in 2012 to extend the payroll tax cut through the remainder of 2012. Republicans and Democrats to date have been unable to agree on how to fund the payroll tax cut for the entire year.

In addition, the temporary legislation continues extended unemployment benefits for millions of Americans and postpones cuts in Medicare reimbursements to doctors, among other things.

'Recapture' Provision

Under the terms negotiated by Congress, the law includes a new “recapture” payroll tax provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100 and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).  

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year.

A statement from the nonpartisan National Payroll Reporting Consortium, issued prior to the measure's passage, warned that "establishing the proposed Social Security Taxable Wage limit of $18,350, to which a reduced 4.2 percent rate would apply through Feb. 29, 2012, would require substantial reprogramming of computer systems" and that "programming of the magnitude that would be required normally takes a minimum of 90 to 180 days for an orderly transition."

Upcoming Guidance

With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS said it will monitor the situation closely in case future legislation changes the recapture provision.

The IRS will issue additional guidance as needed to implement the provisions of the two-month extension, including revised employment tax forms and instructions and information for employees who might be subject to the new recapture provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012, is due April 30, 2012.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Article—External:

Payroll Tax 'Fig Leaf' Is Big Relief for Payroll Pros and Small Businesses, Forbes, December 2011

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