4.2% employee Social Security rate extended through February 2012

Update: Dec. 23, 2011

On Dec. 23, Congress voted to extend the 4.2% employee Social Security tax rate through Feb. 29, 2012. President Obama immediately signed the bill—H.R. 3765—preventing the employee rate from reverting to 6.2% on Jan. 1, 2012.

Negotiations between the House and Senate to keep the tax rate at 4.2% for the remainder of 2012 will open in early January.

Catch: The bill attempts to prevent high earners from maxing out on their Social Security taxes by Feb. 29. Employees who earn more than $18,350 by the end of February will pay an additional 2% income tax. (An earlier version of the tax extension had the Social Security rate reverting to 6.2% if wages exceeded $18,350 during January and February). 

The IRS has clarified that the tax isn’t subject to credits or deductions, and will be collected when employees file their 2012 1040s.

Dec. 20, 2011

House rejects two-month payroll tax holiday extension

The U.S. House of Representatives on Dec. 20 rejected a Senate plan to extend a 2 percentage point payroll tax cut for two months to buy time for talks on a full-year renewal. The vote leaves employers wondering how to plan their payroll operations in January.

The so-called payroll tax holiday was a 2011 economic stimulus measure that cut employees’ share of the Social Security tax from 6.2% to 4.2%. Unless Congress renews it by Jan. 1, the rate will revert to 6.2%, meaning lower take-home pay for 160 million wage earners.

On Saturday, Dec. 17, the Senate voted 89 to 10 to pass a two-month extension of the 4.2% tax rate, running until Feb. 29, 2012. Thirty-nine Republican senators backed that measure.

But now House Republicans are arguing for a 12-month extension, and calling for a House-Senate conference committee to forge a compromise. That’s a problem because the Senate has already recessed for the year and hasn’t scheduled any legislative action until Jan. 23.

The House rejected the Senate legislation 229 to 193. All but seven House Republicans voted against consideration of a two-month extension.

Note: This is the worst possible situation for employers trying to determine how to handle payroll withholding in 2012. A two-month extension would have been awkward to deal with. Having no idea what withholding rate to use is even harder. With just days remaining for Congress to agree on legislation and for President Obama to sign it, it’s impossible to predict what the 2012 Social Security tax rate will be.

Advice: It would be prudent to proceed as if the employee Social Security rate will default to 6.2% on Jan. 1, 2012.

Keep up with developments on this and other withholding issues at 2012 FICA wage base, employee tax rate.