Monday, January 9, 2012

Two Month Payroll Tax Cut

Employers should implement the just-passed two-month extension of the employee-side payroll tax cut as soon as possible – in other words just continue it from last year. Hopefully, if they extend this to all of 2012 they will do so before the 2 months end and not make it retroactive AFTER everyone has withheld the higher amount. In this instance, employers will (1) need to make an adjustment on their Form 941 to obtain and reflect the refunded portions previously remitted to the IRS, and (2) may either need to provide the employees with these funds while awaiting the refund from the IRS or have the employees face a delay in receiving a refund of the overwithheld Social Security taxes.

This time the cut includes a recapture provision which applies only to those individuals who receive more than $18,350 in compensation during the two-month period and only if the cut is not extended to a full year. The recapture of the 2% not withheld would be payable in 2013 when the individual files his or her income tax return for the 2012 tax year. This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.

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