When Congress enacted the payroll tax cut it boasted that nearly 160 million workers would benefit from the extension of the reduced payroll tax rate that was in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extended the 2% point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through the year.
It was the employers responsibility to implement the new payroll tax rate no later than the beginning of the year. We know our clients (CPAs, tax attorneys, financial professionals) were on top of this for themselves and for their clients. The IRS has given a small amount of leeway for any Social Security tax over-withheld during January, stating that employers should make an offsetting adjustment in workers’ pay not later than March 31, 2012.
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base is $110,100 and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
This additional recapture tax is an add-on to income tax liability that the employee — your client — would otherwise pay for 2012 and is not subject to reduction by credits or deductions. But be aware: the recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for the following year, Attorneys Corporation Service, Inc. will closely monitor the situation in case future legislation changes the recapture provision.
Continue to check back as the IRS will issue revised employment tax forms and instructions and information for employees who may be subject to the “recapture” provision. Tax professionals take note: For most employers, the quarterly employment tax return for the latest quarter.
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