New Law Keeps Payroll Tax Cut in Place Through February 2012

12/27/2011

New Law Keeps Payroll Tax Cut in Place Through February 2012

On December 23, after a grinding, down-to-the-wire battle, Congress passed H.R. 3765, the "Temporary Payroll Tax Cut Continuation Act of 2011" (TTCA). The bill was signed into law by President Obama shortly thereafter. The tax provisions of the TTCA consist of a two-month temporary extension of the payroll tax cut in place for 2011, plus a parallel extension of a lower Self-Employment Contributions Act (SECA) tax rate on self-employment income.

History. The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers: one for Old Age, Survivors, and Disability Insurance (OASDI), commonly known as the Social Security tax; and the other for Hospital Insurance (HI), commonly known as the Medicare tax. Before passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act), the FICA tax rate was:
• 7.65 percent for employees and employers (6.2 percent OASDI and 1.45 percent HI)
• 15.3 percent for self-employed taxpayers (12.4 percent OASDI and 2.9 percent HI)

There is a maximum amount of compensation subject to the OASDI tax (the wage base), but no maximum for HI. (The wage base is $106,800 for 2011 and $110,100 for 2012.)

Temporary tax cut for 2011.For remuneration received during 2011, the 2010 Tax Relief Act reduced the OASDI tax rate under the FICA tax by two percentage points to:
• 4.2 percent OASDI for employees only
• 10.4 percent OASDI for self-employed taxpayers

Additionally, a self-employed taxpayer is allowed an above-the-line income tax deduction of 59.6 percent of the self-employment tax. This new percentage, 59.6 percent, replaces the 50 percent allowed under pre-2010 Tax Relief Act law for this portion of the deduction.

New law. Under TTCA, the two-percentage point OASDI tax rate reduction is extended to apply to covered earnings paid in the first two months of 2012 to employees and self-employed taxpayers.

TTCA also provides for a recapture of any benefit a taxpayer may have received from the reduction in the OASDI tax rate for remuneration received during the first two months of 2012 in excess of $18,350 (i.e., two-twelfths of the 2012 wage base of $110,100). The recapture is accomplished by a tax equal to two percent of the amount of wages received during the first two months of 2012 that exceed $18,350.

If you would like to discuss the impact of this new legislation on you or your business, please contact Doug Yoakley or Elizabeth Wright at PYA, (800) 270-9629.

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