New Payroll Tax Holiday
April 5, 2012
Just before President's Day, the members of Congress agreed to extend the "payroll tax holiday" for the rest of 2012. Debate over the extension had fueled bipartisan politics in this national election year. History lesson: Both employees and employers are required to pay the "Social Security tax" portion of FICA tax at a rate of 6.2% on wages up to an annual threshold called the "wage base." The Social Security wage base for 2012 has been raised to $110,100 (up from $106,800), the first increase in several years. The "Medicare tax" portion of the FICA tax rate of 1.45% applies to all wages earned during the year. However, the massive tax law enacted at the end of 2010 granted a payroll tax holiday, for the first time ever. For the 2011 tax year the usual 6.2% Social Security tax for employees was reduced by 2% to an effective rate of 4.2%. Self-employed individuals, who must effectively pay both parts of the Social Security tax at a combined 12.4% rate, received a comparable 2% tax reduction. Employers were otherwise still liable for Social Security tax at the 6.2% rate. Example: Mary Smith earns $100,000 a year from Small Biz Corporation. In a regular year, Mary would pay Social Security tax of $6,200 (6.2% of $100,000) plus $1,450 in Medicare tax (1.45% of $100,000), for a total FICA tax of $7,650 (7.65% of $100,000). Small Biz Corp. would have to pay the same $7,650 in FICA tax on Mary's wages. Thanks to the payroll tax holiday in 2011, Mary only had to pay $5,650 (5.65% of $100,000) in FICA tax last year. So she saved $2,000 in payroll tax. Conversely, Small Biz Corp. had to pay the same $7,650 in FICA tax on Mary's wages. After much political wrangling at the end of 2011, Congress enacted a stop-gap measure extending the 2% reduction for employees for two months through February 29, 2012. It also included a recapture provision for employees who received more than $18,350 in wages during the first two months of 2012 (the two-month equivalent of the $110,100 wage base for 2012). The subsequent legislation extending the payroll tax holiday for the rest of the year also repealed the recapture provision relating to the first two months of 2012. Contact Faw Casson if you have any questions about your situation.