It’s time to party like it’s 2011.
Alert: The new Middle Class Tax Relief and Job Creation Act of 2012, signed by the president on Feb. 22, extends the “payroll tax holiday” for the remainder of the year. Without this new legislation, the holiday would have ended with a thud on March 1.
The new law also repeals a recapture provision that would have applied to high-income wage-earners.
Here’s the whole story: Under the rules that normally apply, both employees and employers must pay a 6.2% Social Security tax on wages up to an annual ceiling. The ceiling for 2012 is $110,110 (up from $106,800 for 2011). Both employees and employers must also pay the 1.45% Medicare on all wages (there is no wage ceiling on this tax).
But the 2010 Tax Relief Act provided a reprieve for employees in 2011, and 2011 only, by reducing the usual 6.2% Social Security tax rate by 2% to 4.2%. Self-employed individuals were entitled to a comparable tax break.
Enacted late last year, the Temporary Payroll Tax Cut Continuation Act of 2011 extended the 2% Social Security tax rate reduction for two months before Congress adjourned. Now, after weeks of political sparring, an extension of the 2% reduction has been approved through the end of the year.
The 2011 temporary law also included a recapture provision for employees who receive more than $18,350 in wages in the first two months of 2012 (based on the $110,100 wage basis). The new law repeals this provision because it’s no longer necessary.
Tip: Talk about a further extension of the payroll tax holiday will likely resurface after Election Day.