2-month payroll tax cut extensionNearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011.  The 4.2% rate for the employee portion of the Social Security payroll tax has been extended through February 29, 2012.  On December 23rd, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act of 2011 (H.R. 3765).  Based on this new legislation, wages earned after December 31, 2011 and before March 1, 2012 will be subject to the 4.2% Social Security Old Age, Survivors, and Disability Insurance (OASDI) withholding rate up to the full Social Security wage base of $110,100.  This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.  Employers will still pay the full 6.2% rate for their portion of the Social Security tax.

The House and Senate passed the measure without a formal vote by unanimous consent.  Under this legislation, the payroll tax will remain at the current 4.2% rate, which began on January 1, 2011, instead of reverting to the 6.2% rate.  Without congressional action, the higher rate would have returned in 2012, meaning an average $1,000 tax increase for 160 million Americans. 

"Because of this agreement, every working American will keep their tax cut, about $1,000 for a typical family," Obama said in a statement after signing the bill into law. That "translates into an extra $40 or so in every paycheck."

“The agreement to extend the payroll-tax cut is a win for small businesses and our job creators can enjoy the holidays without worrying about whether or not their taxes will go up,” said Fred Baldasarro, spokesman for the U.S. Small Business Administration, in a statement. “Small-business owners want certainty and this deal ensures that we keep the wind at their backs.”

What is the ‘Recapture’ Provision of the New Law?
Under the terms negotiated by Congress, the law also includes a new “recapture” 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).   

Read the IRS News Release: Payroll Tax Cut Temporarily Extended into 2012

Read the Article on Yahoo! News: Congress Punts Hard Payroll Tax Work to 2012

Read the Article on Bloomberg Businessweek: Payroll Tax-Cut Extension Sets Up 2012 Fight Over Longer Plan

Photo Credit: Official White House Photo by Pete Souza