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The payroll tax party isn’t over

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in Small Business Tax,Small Business Tax Deduction Strategies

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.

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