What's Going On with the Payroll Tax Cut?

On Dec. 23, 2011, the U.S. House and the Senate reached an agreement that will extend the "payroll tax cut" through Feb. 29, 2012. The "payroll tax cut" temporarily lowers the Social Security withholding tax rate on wages earned by employees from 6.2% to 4.2%. The cut originally was only supposed to last for one year, beginning with wages earned on Jan. 1, 2011. The new agreement extends the payroll tax cut through Feb. 29, 2012.

Recapture Provision

Under the new agreement, the 4.2% employee Social Security withholding rate may be used on the first $110,100 of wages earned by an employee through February 29. If an employee's wages during the first two months of 2012 exceed $18,350, and the payroll tax cut is not extended for the remainder of 2012, an amount equal to 2% of those excess wages would ultimately be recaptured on the employee's 2012 personal tax return.

The new agreement calls for the House and the Senate to immediately appoint conferees to meet in the coming weeks to hopefully come to an agreement on a full-year payroll tax cut extension in 2012. 

Stayed tuned to Checkmate E-News for updates on this issue and many others that will impact payroll and workforce management in 2012.