Employees will continue to receive larger paychecks for the rest of this year based on a lower Social Security tax withholding rate of 4.2%. This reduced rate (from 6.2% to 4.2%), originally in effect for all of 2011, was previously extended through February 2012. A recently enacted law, the Middle Class Tax Relief and Job Creation Act of 2012, further extends the payroll tax reduction to the end of 2012.
A rate reduction in the Social Security portion of the self-employment tax, from 12.4% to 10.4%, applies for self-employed individuals. For 2012, the Social Security tax applies to the first $110,100 of wages and net self-employment income received by an individual.
The new law also repeals the recapture provision included in the previous extension that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture provision does not apply.
Revised Payroll Tax Form Available for Employers
Revised Form 941, Employer’s Quarterly Federal Tax Return, is now available for employers to properly report the newly-extended payroll tax cut.
No action is required by employees to continue receiving the payroll tax cut. As before, the lower rate will have no effect on employees’ future Social Security benefits.
The Internal Revenue Service will issue additional guidance, as needed, to implement the newly-extended payroll tax cut, and any further updates will be posted on IRS.gov. To read more about the Social Security and Medicare payroll taxes, please visit our section on the Federal Insurance Contributions Act (FICA).