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What The Two Month Payroll Tax Cut Extension Means for You

Federal lawmakers finally reached a compromise or at least for the next two months on the payroll tax cut extension. While the average taxpayer will keep an extra $83 in their pockets, employers may have been dealt a major blow.

social-security-tax-cut-extended-to-2012The history behind the payroll tax cut extension?
Earlier this year, lawmakers reached an agreement to reduce the social security tax from 6.2% to 4.2% for all wages earned up to $106,800. This means that an individual earning $100,000, will have $2,000 (2%*$100,000) in additional annual income as compared to last year.

The Employers’ portion of the social security tax of 6.2% remains the same. Congress has been debating over the past few months whether to extend the payroll tax cut through all of 2012. Despite the bickering, a compromise was reached or at least for the next two months as the payroll tax cut will be extended through February 29th, 2012.

What does this means for the average taxpayer?
The average taxpayer earning $50,000 annually will continue to see social security tax at 4.2% which means they won’t lose the extra ~$41.50 they’ve been receiving every two weeks in 2011. To be clear, if your gross income doesn’t increase or decrease, your total security tax paid as shown on your pay stub will be the same as in 2011.

What may this mean for employers?
A two month extension creates a payroll nightmare for employers. Payroll as you may be aware is calculated on a quarterly basis or every three months. A two month payroll tax cut extension means that employers will likely have to calculate first quarter payroll based on a 4.2% rate for the first two months and 6.2% for the third month. Not only does bifurcating payroll complicate things for employers, it also means that there will be more mistakes that can be costly to the taxpayer too.

What will happen after February?
As of now, social security tax will revert back to 6.2% but it is possible or at least lawmakers claim that they plan to reach an agreement to extend the payroll tax cut throughout 2012. But, an agreement will have to be reached by February 29, 2012. For now, we will have to plan for both scenarios.

More Questions? Browse Answers or ask your tax questions online.

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