On December 23, 2011, President Obama signed into law H.R. 3765, the Temporary Payroll Tax Cut Continuation Act of 2011, extending the current 4.2% Social Security Old-Age, Survivors, and Disability Insurance (OASDI) tax rate for employees to wages paid after 12/31/2011 and before March 1, 2012.
What are the new Tax Rates and Taxable Wage Limits?
For comparison, employee OASDI tax rates and taxable limits in recent years, and as revised by the Act, follow:
Year Taxable Wage Limit Tax Rate Tax Cap
2010 $106,800 6.2% $6.621.60
2011 $106,800 4.2% $4,485.60
2012 (through 2/29/2012)$110,100 4.2% $4,624.20
2012 (after 2/29/2012) $110,100 6.2% $6,826.20**
When are the new tax rates and taxable wage limits effective and for how long?
The extension just signed by President Obama is effective from January 1, 2012 through February 29, 2012. Congress and the White House have expressed their intention to pursue further legislation to extend the reduced 4.2% OASDI tax rate through 2012. If this occurs, the maximum an employee would pay in 2012 for OASDI would be $4,624.20
What happens if future legislation does not extend the reduced OASDI Tax Rate through 2012?
If subsequent legislation does not extend the reduced OASDI tax rate through 2012, the maximum tax** ($6,826.20 see table above) would be the sum of (Social Security taxable wages paid through 2/29/2012 multiplied by 4.2%) plus (Social Security taxable wages paid after 2/29/2012 x 6.2%).
Additionally, if the Social Security tax rate increases to 6.2% in March, employers may need to separately store and report wages and taxes associated with the two parts of the quarter and year in which the different tax rates apply. IRS Forms 941 and W-2 would likely be modified to require such reporting.
How will the payroll tax cut extension impact highly compensated individuals or individuals who start work on March 1, 2012 (after the extension expires)?
It is possible that highly compensated employees could satisfy their 2012 OASDI tax liability at the 4.2% rate; i.e., they are paid wages of $110,100 prior to March 1. The Act provides that if an employee's wages during the first two months of 2012 exceed $18,350, an amount equal to 2 percent of the excess wages would be recaptured on the taxpayer’s individual income tax return for 2012.
Conversely, some employees may pay their entire 2012 OASDI tax at the higher 6.2% rate; for example, a person who begins work after February 2012.
The employee OASDI tax rate was previously reduced to 4.2% by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312), which was in effect for 2011 only. Employees also pay a Medicare tax equal to 1.45% of all covered wages. Unlike the Social Security tax, Medicare has no taxable wage limit.
Will employers’ Social Security and Medicare tax rate be impacted as a result of the new extended payroll tax legislation?
Employers will continue to pay Social Security tax of 6.2% up to the taxable wage limit for each worker ($110,100), as well as the 1.45% Medicare tax, with no limit.
Employers may wish to notify employees that their Social Security tax rate will remain 4.2% through at least February 29, 2012. |
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